Foreign Exchange Market Microstructure
Research on foreign exchange market microstructure focuses on the idea that trading is an integral part of the process whereby information relevant to the pricing of foreign currency becomes embedded in spot rates. Micro-based models of this process produce empirical predictions that find strong support in the data. Micro-based models can account for a large proportion of the daily variation in spot rates. They also supply a rationale for the apparent disconnect between spot rates and fundamentals. Micro-based models provide out-of-sample forecasting power for spot rates that is an order of magnitude above that usually found in exchange-rate models.
KeywordsArbitrage Common knowledge news Depreciation rates Exchange rate dynamics Exchange rate puzzles Financial market contagion Foreign exchange market microstructure Foreign exchange risk premium Information aggregation Order flows Spot exchange rates Stop-loss orders
JEL ClassificationsF3 F33
- Evans, M., and R. Lyons. 2003. How is macro news transmitted to exchange rates? Working Paper No. 9433. Cambridge, MA: NBER.Google Scholar
- Evans, M., and R. Lyons. 2004a. A new micro model of exchange rates. Working Paper No. 10379. Cambridge, MA: NBER.Google Scholar
- Evans, M., and R. Lyons. 2004b. Exchange rate fundamentals and order flow. Working paper. Online. Available at http://www.georgetown.edu/faculty/evansm1/. Accessed 16 Nov 2007.
- Evans, M., and R. Lyons. 2005c. Exchange rate fundamentals and order flow. Mimeo, Georgetown University. Online. Available at http://www.georgetown.edu/faculty/evansm1/. Accessed 6 June 2006.
- Love, R., and R. Payne. 2003. Macroeconomic news, order flows, and exchange rates. Discussion Paper No. 475. Financial Markets Group, London School of Economics.Google Scholar