Macroeconomic Order Flows: Explaining Equity and Exchange Rate Returns
Preprint
- 29 November 2004
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure - order flow. Order flow is the proximate determinant of price in all microstructure models. We explain aggregate equity returns as well as exchange rates in a model with heterogenous beliefs. Belief changes are shown to be observable through order flow. To test the model we construct daily aggregate order flow data from all equity trades in the U.S. and France from 1999 to 2003. Almost 60 percent of the daily returns in the S&P100 index is explained jointly by exchange rate returns and macroeconomic order flows.Keywords
This publication has 15 references indexed in Scilit:
- Asset return dynamics and the FX risk premium in a decentralized dealer marketEuropean Economic Review, 2004
- Order imbalance and individual stock returns: Theory and evidencePublished by Elsevier ,2003
- Exchange Rate, Equity Prices and Capital FlowsPublished by National Bureau of Economic Research ,2002
- Informational integration and FX tradingJournal of International Money and Finance, 2002
- Time-varying liquidity in foreign exchangePublished by Elsevier ,2002
- Order imbalance, liquidity, and market returnsPublished by Elsevier ,2002
- How has the euro changed the foreign exchange market?Economic Policy, 2002
- Order Flow and Exchange Rate DynamicsJournal of Political Economy, 2002
- Common factors in prices, order flows, and liquidityJournal of Financial Economics, 2001
- Chapter 33 Empirical research on nominal exchange ratesPublished by Elsevier ,1995