Exchange; Microstructure; Volatility; DCC-GARCH
The models of microstructure have gained considerable space in the economic literature,
emerging as a counterpoint to those based purely on macroeconomic fundamentals.. In this
way the effort started to be in micro-fund the exchange market, starting from behavioral
hypotheses of the agents involved in this market. Thus a new key variable known as the
order flow appears in the literature, with several models relating the same to the changes
in the exchange rate. With the confirmation of the relevance of the flow of orders in
exchange rates and already estimated by several authors the magnitudes of their impacts,
this paper uses a new approach: multivariate conditional heteroscedasticity models. In the
microeconomic model proposed by citeonline evans2007exchange, when we specify the
relationship between risk and exchange rate, we estimate how the volatility in the risk
variables is transmitted to the exchange, also testing its effects on the order flows. Using
the DCC-GARCH, we estimated the dynamic correlations, indicating the occurrence of
volatility transfer between risk and price variables. In relation to the order flow variables,
in most cases the relationship was inconsistent or very low. The results show that there
is a transfer of volatility between the risk variables and exchange rates, especially the
CDS. When analyzing the risk relationships vs. orders flow, the results were inconclusive,
concluding that agents react to changes in risk variables by first modifying the exchange
price, rather than changing their portfolios.