Working Paper: NBER ID: w12682
Authors: Takatoshi Ito; Yuko Hashimoto
Abstract: This paper examines the price impact and the predictability of the exchange rate movement using the transaction data recorded in the electronic broking system of the spot foreign exchange market. The number of actual deals at the ask (or bid side) for a specified time interval may be regarded as "order flows" to buy (or sell) in Richard Lyons' work. First, the contemporaneous impact of order flows on the quote and deal prices are analyzed. Second, the price predictability is examined. Our forecasting equations of the exchange rate for the next X minutes (X=1, 5, 15, 30) show that coefficients are significantly different from zero in both 5-min and 1-min forecast horizons, but the significance disappears in the 30-minute interval. The t-statistics become larger as the prediction window becomes shorter. Price impacts of deals at one side of the market are significant but short-lived. Market participants, if they can observe and analyze all the transactions information in real time, may be able to extract information to predict the price movements in the following next few minutes.
Keywords: Exchange rate; Order flow; Predictability
JEL Codes: F31; F33; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate movement (F31) | random walk (C69) |
| order flows (C69) | price movements (E30) |
| order flows (C69) | quote prices (P22) |
| order flows (C69) | deal prices (P22) |
| buyer-initiated trades (G24) | price increase (D49) |
| seller-initiated trades (G24) | price decrease (D41) |
| order flows (C69) | predictability of price movements (G17) |