Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/152858 
Year of Publication: 
2004
Series/Report no.: 
ECB Working Paper No. 424
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We propose a simple structural model of exchange rate determination which draws from the analytical framework recently proposed by Bacchetta and van Wincoop (2003) and allows us to disentangle the liquidity and information effects of order flow on exchange rates. We estimate this model employing an innovative transaction data-set that covers all direct foreign exchange transactions completed in the USD/EUR market via EBS and Reuters between August 2000 and January 2001. Our results indicate that the strong contemporaneous correlation between order flow and exchange rates is mostly due to liquidity effects. This result also appears to carry through to the four FX intervention events that appear in our sample.
Subjects: 
Exchange Rate Dynamics
Foreign Exchange Micro Structure
order flow
JEL: 
D82
G14
G15
Document Type: 
Working Paper

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