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Frank Westerhoff and Sebastiano Manzan
''Does liquidity in the FX market depend on volatility?''
( 2004, Vol. 6 No.10 )
We re-examine the relationship between exchange rates and order flow as proposed by Evans and Lyons (2002). Compared to their linear specification, we find that the response of exchange rates to order flow may depend on market historical volatility. If market historical volatility is high, a given order seems to have a lower price impact than in calmer periods. Overall, our simple threshold mechanism has the power to produce higher correlation coefficients.
Keywords: exchange rate dynamics
JEL: F3 - International Finance: General
Manuscript Received : Aug 20 2004 Manuscript Accepted : Aug 25 2004

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