Testing for the informational content in microstructure variables for the exchange rate

Abstract

This paper aims to answer whether there is information content in microstructure variables to explain changes in the domestic exchange rate. Empirical results show that the informational content is in line with international evidence. Variables such as order flow and negotiated volume in the future market posses incremental content that help explains changes in exchange rates in Brazil. Besides, increases in the volume participation of dealers that participate directly in Central Bank operations are associated to decreases in the exchange rate volatility, which suggests that such operations have been effective in reducing the exchange rate volatility.