جریان نظم بین المللی در تشریح حقوق صاحبان سهام و بازده نرخ ارز

Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructure–order flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications are also validated for intraday returns.

The aggregate stock market index and the exchange rate are known to have a very low correlation with any other measurable macroeconomic variable except at very low frequencies (Frankel and Rose, 1995 and Rogoff, 2001). Financial economists interpret this very lack of predictability as evidence for efficiency, whereby only unpredictable news should move prices. But even gathering proxy variables for news ex-post does not seem to substantially increase the explanatory power of asset pricing models (Roll, 1988). This motivates us to examine a new financial market variable called order flow in its relationship to stock and exchange rate returns. Order flow is the net of buy minus sell initiated orders.3 In the foreign exchange market, daily exchange rate returns and daily order flow show a remarkably high correlation ( Evans and Lyons, 2002a, Evans and Lyons, 2002b, Evans and Lyons, 2002c and Killeen et al., 2006) and even permanent changes in the exchange rate appear to be explained by order flow. Unfortunately, most of the microstructure literature features order flow as an exogenous variable in a single market setting. Its very origin remains unexplained and this lack of economic structure constrains the analysis. In this paper we derive order flow as the result of belief changes by heterogenous investor groups and explore if such a paradigm can structurally explain international equity and exchange rate returns. First, we provide a micro-founded market model in which order flow is the result of belief changes of three different investor groups. This allows for a structural interpretation of order flow regressions. The model features a two-country multi-market setting in which we can explore the relationship between equity, foreign exchange and bond markets. In particular, we obtain testable restrictions which link equity returns to the various order flows. We explicitly model exchange rate determination unlike much of the international investment literature (see Albuquerque et al., 2006). Second, we show that our empirical framework explains up to 60% of the daily return variations in the S&P 100 index. In accordance with the theory, both exchange rate returns and order flow into the overseas market have explanatory power for the domestic stock market returns. Third, our model can account for observable asymmetries in the correlation structure between equity returns and exchange rates. For example, most U.S. equity market appreciations typically come with U.S. dollar appreciations, while European equity market returns correlate negatively with Euro appreciations. The starting point of our analysis is a coherent interpretation of order flow itself. What motivates trades through market orders as opposed to limit orders? In most microstructure models of limit order markets those market participants with private asset valuations removed from the current midprice tend to pursue market order strategies.4 The intuition is straightforward. Execution uncertainty related to limit order submission is a multiplicative factor of the expected benefit of a trade. In the absence of risk aversion, the probability of non-execution reduces the expected trade benefit linearly as the difference between current midprice and the private value increases. The cost of market order submission by contrast is an additive cost related to the effective spread. It is unchanged by more extreme private asset valuations. A large change in the asset valuation by a segment of market participants will therefore tend to trigger predominantly market orders. This feature of modern limit order markets makes order flow a suitable proxy for (substantial) investor belief changes. Our simple market model captures this aspect, namely order flow is simply a linear function of belief changes. Hence, order flows can be used to identify heterogeneous belief changes within a segmented investor population. We do not deny that other trade motivations like (urgent) hedging or liquidation needs might also come with a preference for market over limit order implementation of the transaction. These trades are outside the model framework and feature as noise in the empirical analysis. We also highlight that we are agnostic about the source of the belief changes. These could be based on private information or have a behavioral explanation. There is a growing literature that considers equity valuation in the context of dispersion of IBES (Institutional Brokers' Estimate System) forecasts. For example, Basak (2000) studies the behavior of security prices in the presence of investors' heterogeneous beliefs regarding the price of risk. In Basak (2005) the basic analysis is generalized to incorporate multiple sources of risk and disagreement about non-fundamentals. Anderson et al. (2005) provide a theoretical treatment of heterogeneous beliefs as well as empirical evidence showing that heterogeneous beliefs matter for asset pricing. A central feature of much of the theoretical literature is a reliance on the combination of behavioral constraints and heterogeneous beliefs. Miller (1977) argues that short-sale constraints could lead to an overvaluation effect because negative views are not acted upon to the same extent as positive ones. An example of the ‘investing with constraints’ literature is Boehme et al. (2006) where short-selling restrictions combined with dispersion in beliefs are shown to imply Miller's overvaluation effects. This follows similar work such as Diether et al. (2002) who find that raw returns of stocks with higher dispersion of analysts' earnings forecasts earn lower future returns than a control sample. There are only a few contributions in the literature where belief changes are aggregated to the country level. Kothari et al. (2006) are of interest because they examine earnings announcements at an aggregate level. This is part of an empirical literature that tests whether stock prices move in response to cash-flow news or discount-rate news (Campbell and Shiller, 1988). In contrast with firm-level evidence, Kothari et al. find that aggregate returns and aggregate earnings growth are negatively correlated for the U.S. equity market. They also find that aggregate earnings growth is strongly correlated with discount-rate proxies such as T-bill rates and that cash-flow news is largely idiosyncratic. In other words, positive market-wide earning innovations are associated with increased discounting because of the macroeconomic policy reaction, such that a negative valuation reaction is found. But we also note that Bernard and Thomas (1990) find exceedingly slow and small price reaction to this kind of public news. A literature which relates more directly to changes in market-wide beliefs, with tenuous links to fundamentals, is the ‘investor sentiment’ literature. A recent example is due to Kumar and Lee (2006) who examine trades of a very large retail investor sample and find that trading direction has a significant systematic component. A similar finding is expressed in the work of Brown et al. (2003) relating to the investment decisions of mutual funds. These papers relate comovements to commonly held market sentiment which is arguably indistinguishable from belief changes about market-wide fundamentals or about macroeconomic stance. To our knowledge there is no research that relates sentiment changes at the national level to international equity portfolio flows, signed order flows or exchange rate returns. Previous work on the relationship between asset returns and order flow has typically been focused on a single asset market. The focus of our paper is the market interaction between equity and exchange rate markets in a partially segmented international asset market. Recent empirical and theoretical work have emphasized the limited market integration of the global equity market (Karolyi and Stulz, 2003, Hau and Rey, 2004, Hau and Rey, 2006, Hau and Rey, 2008 and Stulz, 2005). The microstructure approach used here can be useful in understanding international market interdependence. We show that domestic equity returns should not only be highly correlated with domestic order flow, but exchange rate returns and order flow into the overseas market should have additional explanatory power for domestic equity returns. The additional explanatory power of overseas order flow is a direct consequence of international equity market interdependence. Order flow in the domestic market may originate either in belief changes of domestic investors or alternatively in belief changes of international investors. But these two types of belief changes are likely to have a very different price impact. The domestic order flow is therefore an insufficient statistics to capture this heterogeneity. However, the belief change of the international investor has a simultaneous impact on the exchange rate and the foreign equity market as well as on the order flow in the oversea market. These variables therefore help to identify the nature of the belief shock causing the domestic price change. Hence, oversea order flow has additional explanatory power for domestic equity returns even after accounting for the total domestic order flow. We highlight that the overall explanatory power for daily index returns is astonishing. For the S&P100 we are able to explain around 60% of the daily return variation and for the CAC40 approximately 40%. International portfolio managers often highlight the asymmetry in the correlation structure of equity and exchange rate returns. Table 1 documents the negative correlation of the U.S. dollar return with the U.S. equity market index and the even more negative correlation of all European equity markets with the same exchange rate return. A symmetric setting should imply opposite signs for the respective correlations, hence the notion of asymmetry in the correlation structure. Our model framework can account for this asymmetry. The exchange rate correlation can be negative for both home and foreign country even after controlling for equity order flows. In particular, differences in the elasticity of demand faced by the international investor in the home and foreign market should generally result in the observed correlation asymmetry. Our paper also relates to a recent literature which focuses on the role of order flow in the U.S. equity market. Hasbrouck and Seppi (2001) show that commonality in the order flows of individual stocks explains roughly two-thirds of the commonality in returns. But this paper restricts itself to high frequency intervals. Chordia and Subrahmanyam (2004) study the relationship between order flow and daily returns of individual stocks. Pastor and Stambaugh (2003) find that market-wide liquidity is a state variable important for asset pricing at the daily frequency. Chordia et al. (2002) document for the period 1988–1998 that aggregate order flow in the NYSE is correlated with contemporaneous daily S&P500 returns. But their regressions are not based on any structural model and show much lower explanatory power. To the best of our knowledge, no paper has tried to formally model aggregate equity returns in terms of aggregate equity order flow or related cross country differences in equity order flows to exchange rate movements. The following section presents the model. Section 3 summarizes and explains the resulting equilibrium relationships. The data is explained in Section 4. The empirical analysis focuses on the two countries for which we were able to construct aggregate daily order flow statistics for an extended time period, namely for the U.S. and France. Section 5.1 discusses the estimation results for aggregate equity daily returns and section 5.2 for intraday returns. Section 6 concludes.

Macroeconomic models account for close to 0% of the international stock and exchange rate returns. This motivates us to explore if simple heterogeneous belief shifts about equity fundamentals provide a better paradigm for explaining the international return dynamics at a daily frequency. We argue that order flow represents a suitable proxy variable to identify such belief changes. A micro-founded model is developed which matches belief changes both to order flows and asset returns. The multi-market setting provides not only for enough observable prices and order flows to identify heterogeneous investor belief shifts, but it also implies testable restrictions about the international market interdependence. We derived a closed-form solution for equity returns in both equity markets, which relates equity returns to the exchange rate and to order flows in both the local and the overseas market. The model can potentially explain asymmetry across countries in the correlations between domestic equity returns and the exchange rate return conditional on order flows. We confront the model with 5 years of daily U.S. and French equity data. The respective daily order flows for the S&P100 and the CAC40 index are constructed based on the aggregation of approximately 800 million individual equity transactions. We find that an extraordinarily high percentage of aggregate equity return variation is explained jointly by exchange rate returns and macroeconomic order flows. Our model can explain approximately 60% of the daily variation in the S&P100 return and 40% of the CAC40 return fluctuations. As predicted by theory, both returns are strongly and positively influenced not only by own market order flow, but also by the order flow in the overseas market. The oversea equity order flows capture international equity substitution effects with a very different home equity return impact from those of the aggregate home market order flow. We highlight that our results are essentially unchanged when estimation is limited to the intraday periods of parallel equity trading in France and the U.S. In summary, heterogeneous belief changes as identified by order flows provide a promising paradigm for future research on equity index movements, exchange rates and international financial market interdependence. More progress in this direction should come from better data structures which not only characterizes aggregate order flow for a particular market (like ours), but identifies order flow for each market by institutional type and location of the counterparties so that the geography of international belief changes can be mapped out more precisely. This would open a new research chapter in international finance.