POSITION OF NON-COMMERCIAL TRADERS IN FOREIGN CURRENCY FUTURES AND SPOT EXCHANGE RATES IN THE LONG RUN
Takvor H. Mutafoglu
The City University of New York, USA.
Microstructure approach to exchange rate determination is a growing phenomenon in exchange rate literature. This approach stresses the significance of buy and sells orders of traders to explain exchange rate movements. Several recent articles have investigated the importance of this approach by testing the long-run relationship between the cumulated order flows and spot exchange rates. This paper examines the cointegration relation between the net position of non-commercial traders in various foreign currency futures and exchange rate movements in the spot market. The results indicate that a stable long-run relationship exists between the cumulated net position of non-commercial traders in foreign currency futures and corresponding spot rates. Moreover, Granger causality tests, produced from error correction models (ECM), point to bidirectional causality in some cases and unidirectional causality in others.
Key words: Exchange Rates, Order Flow, Futures Markets, Cointegration
JEL Codes: F31, F32