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.
ASJC Scopus subject areas
- Economics and Econometrics