Microstructure order flow: statistical and economic evaluation of nonlinear forecasts

Cerrato, M. , Kim, H. and MacDonald, R. (2015) Microstructure order flow: statistical and economic evaluation of nonlinear forecasts. Journal of International Financial Markets, Institutions and Money, 39, pp. 40-52. (doi: 10.1016/j.intfin.2015.05.010)

Abstract

In this paper we propose a novel extension of the standard market microstructure order flow model by incorporating non-linearities into the order flow–exchange rate relationship. This important issue has not been accounted for in the existing empirical literature. We investigate this issue using a new data set and focusing on out-of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. While there is little statistical value in conditioning on our proposed models, its economic value is significantly high.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Cerrato, Professor Mario and MacDonald, Professor Ronald
• Authors: Cerrato, M., Kim, H., and MacDonald, R.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of International Financial Markets, Institutions and Money
• Publisher: Elsevier
• ISSN: 1042-4431
• ISSN (Online): 1873-0612