An investigation of customer order flow in the foreign exchange market

Cerrato, M. , Sarantis, N. and Saunders, A. (2011) An investigation of customer order flow in the foreign exchange market. Journal of Banking and Finance, 35(8), pp. 1892-1906. (doi: 10.1016/j.jbankfin.2010.12.003)

Abstract

This paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new, and the largest, proprietary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs. We make several contributions. Firstly, we investigate the extent to which customer order flow can help to explain exchange rate movements over and above the influence of macro-economic variables. Secondly, we address the issue of whether order flows contain (private) information which explain exchange rates changes. Thirdly, we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the micro-structure literature. Finally we address the question of whether the out-of-sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets.

• Item Type: Articles
• Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 35(8), DOI: 10.1016/j.jbankfin.2010.12.003
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Cerrato, Professor Mario
• Authors: Cerrato, M., Sarantis, N., and Saunders, A.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of Banking and Finance
• Publisher: Elsevier
• ISSN: 0378-4266
• Published Online: 14 January 2011
• Copyright Holders: Copyright © 2011 Elsevier
• First Published: First published in Journal of Banking and Finance 35(8):1892-1906
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher