Currency Order Flow and Exchange Rate Determination: Empirical Evidence from the Malaysian Foreign Exchange Market

Anifowose, Abolaji Daniel and Ismail, Izlin and Sukor, Mohd Edil Abd (2018) Currency Order Flow and Exchange Rate Determination: Empirical Evidence from the Malaysian Foreign Exchange Market. Global Business Review, 19 (4). pp. 902-920. ISSN 0972-1509

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Official URL: https://doi.org/10.1177/0972150918772925

Abstract

This article presents empirical test results of Malaysian foreign exchange market microstructure assessment of exchange rate dynamics. We apply vector autoregressive (VAR) model to estimate the influential role of currency order flow in the determination of the currency exchange rate for the Malaysian ringgit (MYR) against the US dollar (USD). We investigate whether currency order flow captures the movements of exchange rate of MYR against USD, and how the long-term and short-term components impact the relative estimation of MYR in the international market. We, construct a measure of order flow in the Malaysian foreign exchange market to reflect the pressure of currency excess demand. Our focus is on the cumulative currency order flow and the exchange rate relationship of MYR and USD. A hybrid model of order flow and exchange rate dynamics proposed by Evans and Lyons (2002a) is applied to the Malaysian foreign exchange market (MYR/USD) to analyse a dataset of every 15-minute currency order flow and exchange rate movements from January 2010 to December 2015. Our dataset has unique features in terms of the quality of the data, extensive period and precise high frequency. Our results show that currency order flow explains an important portion of the movements in the MYR–USD exchange rate.

Item Type: Article
Uncontrolled Keywords: currency order flow; Exchange rate; foreign exchange market; market microstructure
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > Foreign exchange. International finance.
Divisions: Faculty of Business and Accountancy > Dept of Finance and Banking
Depositing User: Ms. Juhaida Abd Rahim
Date Deposited: 20 Sep 2019 03:46
Last Modified: 20 Sep 2019 03:46
URI: http://eprints.um.edu.my/id/eprint/22471

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