Multiscale analysis of microstructure causality in the foreign exchange market (pp. 47-52)

Nikola Gradojevic
Recent scholarly work on the causal relationship between exchange rate movements and currency order flows has provided mixed results. This paper proposes a wavelet approach for determining multiscale causality between the Canada/U.S. dollar returns and aggregate market order flow. Evidence of bi-directional causality that contradicts the microstructure literature is found for almost all time scales. Multiresolution analysis identifies significant structural breaks in the data that are potentially driving such findings.