A hybrid approach to exchange rates: How do macro news and order flow affect exchange rate volatility?
Abstract
Purpose
This study aims to investigate the impact of information, both public macro news and private information, on exchange rate volatility in an integrated framework.
Design/methodology/approach
The authors apply real-time data of macro announcements and high-frequency trading data (German Deutsche Mark to US dollar, DEM/USD, from 1 May to 31August 1996) to GARCH models and examine various model specifications.
Findings
Data analysis demonstrates real-time macro news and market makers’ private information both have a significant impact on exchange rate volatility, but there is no interaction between macro and micro information in the information transmission process.
Originality/value
This study contributes to empirical hybrid studies of examining exchange rates volatility, which is in line with literature that combine both macro and micro fundamentals in examining exchange rates variation. Particularly, a key element of this study is to use a microstructure fundamental variable, namely, order flow, to capture private information in an exchange rate volatility study.
Keywords
Citation
Zhang, G., Marsh, I. and MacDonald, R. (2016), "A hybrid approach to exchange rates: How do macro news and order flow affect exchange rate volatility?", Studies in Economics and Finance, Vol. 33 No. 1, pp. 50-68. https://doi.org/10.1108/SEF-10-2014-0185
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited