Multiscale Analysis of Microstructure Causality in the Foreign Exchange Market
Published 2010-06-30
Keywords
- Wavelets,
- Causality,
- Foreign Exchange Markets,
- Market Microstructure
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Abstract
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.
Article history: Received (09.09.2010); Revised (27.09.2010); Accepted (25.10.2010)