Premium
Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set
Author(s) -
CHINN MENZIE D.,
MOORE MICHAEL J.
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00460.x
Subject(s) - liberian dollar , order (exchange) , sample (material) , econometrics , exchange rate , us dollar , economics , flow (mathematics) , data set , random walk , set (abstract data type) , stability (learning theory) , specification , computer science , monetary economics , mathematics , statistics , finance , geometry , machine learning , programming language , chemistry , chromatography
We propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the Evans–Lyons microstructure approach. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on interdealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or “hybrid,” model exhibits greater in‐sample stability and out of sample forecasting improvement vis‐à‐vis the basic macroeconomic and random walk specifications.