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Research Article
ORDER FLOW AND EXCHANGE RATE DYNAMICS: AN APPLICATION TO EMERGING MARKETS
Article first published online: 29 NOV 2011
DOI: 10.1002/ijfe.451
Copyright © 2011 John Wiley & Sons, Ltd.
Issue
International Journal of Finance & Economics
Early View (Online Version of Record published before inclusion in an issue)
Additional Information
How to Cite
Duffuor, K., Marsh, I. W. and Phylaktis, K. (2011), ORDER FLOW AND EXCHANGE RATE DYNAMICS: AN APPLICATION TO EMERGING MARKETS. Int. J. Fin. Econ.. doi: 10.1002/ijfe.451
Publication History
- Article first published online: 29 NOV 2011
- Manuscript Accepted: 6 JUN 2011
- Manuscript Received: 5 NOV 2010
- Abstract
- Article
- References
- Cited By
Keywords:
- order flow;
- foreign exchange markets;
- exchange rates;
- forex microstructure
ABSTRACT
The paper examines short-run exchange rate dynamics in an emerging market based on the recent microstructure framework of foreign exchange markets where the main explanatory variable is the order flow of end-user customers. The study makes two main contributions to the literature: it modifies the basic microstructural FX model to take account of key features of the majority of emerging markets, namely the existence of a black market for FX and the presence of market inefficiencies; and it uses a unique database covering almost the complete Ghanaian market, and for a long time span compared with previous studies. We find that the unexpected component of order flow has a positive and long-lived effect on the official exchange rate in both stable and crisis periods, consistent with the basic microstructural approach. The price impact of unexpected order flow is related to the level of liquidity in the market. Expected order flow also impacts the exchange rate, suggesting inefficiencies in the market. Copyright © 2011 John Wiley & Sons, Ltd.