International order flows: Explaining equity and exchange rate returns

Michael Moore, Harald Hau, Peter Dunne

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructure – order flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications are also validated for intraday returns.
Original languageEnglish
Pages (from-to)358-386
Number of pages29
JournalJournal of International Money and Finance
Volume29 (2)
Issue number2
Publication statusPublished - Mar 2010

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

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