TY  - JOUR
AU  - Evans,Martin D. D.
AU  - Lyons,Richard K.
TI  - Understanding Order Flow
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11748
PY  - 2005
Y2  - November 2005
UR  - http://www.nber.org/papers/w11748
L1  - http://www.nber.org/papers/w11748.pdf
N1  - Author contact info:
Martin Evans
Department of Economics
Georgetown University
Washington, DC  20057
Tel: 202-687-1570
E-Mail: evansm1@georgetown.edu

Richard K. Lyons
460 Michigan Ave
Berkeley, CA 94707
Tel: 510-642-1059
Fax: 510-642-4700
E-Mail: lyons@haas.berkeley.edu
AB  - This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates. Third, about one third of order flow's power to forecast exchange rates one month ahead comes from flow's ability to forecast future flow, whereas the remaining two-thirds applies to price components unrelated to future flow. We show that all of these features arise naturally from end-user heterogeneity, in a setting where order flow provides timely information to market-makers about the state of the macroeconomy.
ER  -