The currency that came in from the cold: Capital controls and the information content of order flow

We analyse how capital controls affect FX microstructure, using as a case study the introduction and subsequent removal of controls in Iceland. We use a VAR of private order flow, Central Bank order flow and EURISK that allows for contemporaneous feedback effects to analyse the impact and informatio...

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Bibliographic Details
Main Authors: Francis Breedon, Thórarinn G. Pétursson, Paolo Vitale
Other Authors: Francis Breedon, Thórarinn G. Pétursson, Paolo Vitale, Breedon, Franci, Pétursson, Thórarinn G., Vitale, Paolo
Format: Book Part
Language:English
Published: Central Bank of Iceland 2021
Subjects:
Order flow
Market microstructure
Capital controls
Iceland
Online Access:http://hdl.handle.net/11564/754222
https://www.sedlabanki.is/library/Skraarsafn---EN/Working-Papers/WP 86 net.pdf
Description
Summary:We analyse how capital controls affect FX microstructure, using as a case study the introduction and subsequent removal of controls in Iceland. We use a VAR of private order flow, Central Bank order flow and EURISK that allows for contemporaneous feedback effects to analyse the impact and information content of trades and find that controls have profound effects. When controls were introduced, volume plummeted, the information content of trading activity declined and became less responsive to macro news. While there was no recovery of trading volume after controls were abolished, the information content and responsiveness of trading activity increased sharply.

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