An Empirical Study of Three Rounds Trading Model of Foreign Exchange Market

Traditional macroeconomic models to explain the exchange rate fluctuations has poor performance, or even worse than random walk. In this paper, from the perspective of microstructure of the foreign exchange market, we made a detailed analysis of the order flow which is the core variable of the foreign exchange rate determination. We employ the approaches of cointegration and error correction model to test the relationship between the order flow time series and the foreign exchange rate time series. And the result show that the explanatory power of the determination model which contains the microeconomic variable is obviously improved.