Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83578
Authors: 
Lovcha, Yuliya
Perez-Laborda, Alejandro
Year of Publication: 
2010
Series/Report no.: 
MNB Working Papers 2010/10
Abstract: 
Over the last decade, the microstructure approach to exchange rates has become very popular. The underlying idea of this approach is that the order flows at different levels of aggregation contain valuable information to explain exchange rate movements. The bulk of empirical literature has focused on evaluating this hypothesis in a linear framework. This paper analyzes nonlinearities in the relation between exchange rates and customer order flows. We show that the relationship evolves over time and that it is different under different market conditions defined by exchange rate volatility. Further, we found that the nonlinearity can be captured successfully by the Threshold regression and Markov Switching models, which provide substantial explanatory power beyond the constant coefficients approach.
Subjects: 
customer order flows
nonlinear models
microstructure
exchange rate
JEL: 
C22
F31
G15
Document Type: 
Working Paper

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