Common Factors, Order Flows, and Exchange Rate Dynamics

We built the largest dataset of high-frequency exchange rates so far. Our sample covers the spot prices and order flows of 19 currency pairs over the last 15 years measured on Reuters and EBS at the thirty-second frequency. We show that common, price-based factors describe exchange rate dynamics at high frequencies at least as well as the quantity-based order flows. The same price-based factors describe exchange rates over a large spectrum of frequencies, from 30 seconds to one month. While the descriptive power of order flows decreases when frequencies decrease, the descriptive power of common factors increases