Price Impacts of Deals and Predictability of the Exchange Rate Movements

   (368 K)

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.

Published:

• Ito, T. and A. Rose (eds.) International Financial Issues in the Pacific Rim, NBER East Asia Seminar on Economics, Volume 17. Chicago: University of Chicago Press, 2008. ,
• Price Impacts of Deals and Predictability of the Exchange Rate Movements, Takatoshi Ito, Yuko Hashimoto, in International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy (NBER-EASE Volume 17) (2008), University of Chicago Press
  

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