Microstructure markets, strategy and exchange rate determination.

The main contribution of this empirical research is to demonstrate that agents’ strategies are important in the exchange rate determination. This research shows that strategic objectives are heterogeneous particularly when they are related to the expectations with respect to volatility. Trading strategies contribute to solving the empirical problem of explaining exchange rates. In this connection, the main research question addresses how far strategies are important in the exchange rates determination. The concept of strategy includes a) the strategic objectives, b) the trading strategies and c) the strategic content (agents preferred variables). This research departs from the Microstructure Markets Models used by Evans (2002, 2010). Unlike the literature, this empirical research includes a survey approach, combined with recently developed techniques in panel time series estimation, such as the Pooled mean-group (Pesaran and Smith 1995, Pesaran and Shin 1999, and Pesaran 2004), and especially the panel second step least squares with time-invariant variables (Panel 2SLS) (Atkinson 2014). The strategic objectives are extracted from the economic literature. Trading strategy characteristics are taken from the strategic management literature, and the strategic content (variables) from the microstructure literature. Among the findings are that: (a) strategic objectives comprise more than the traditional objective ‘profiting from investments’; (b) the effect of planning and learning strategies on the exchange rates is both important and statistically significant; and (c) market homogeneity is related to the strategic information used by market agents