Dynamics of exchange rate determination and currency order flow in the Thailand foreign exchange market

Abstract

Purpose The purpose of this paper is to present the essential role that currency order flow plays in the foreign exchange markets of emerging economies in the determination of their currencies in the short and the long-run against major currencies of the world, which cannot be over emphasized, most especially against the US dollar. Insomuch that, if some of these emerging economies can be successfully transmitted into full development, it would be a good model for other emerging economies and the world at large. Design/methodology/approach A hybrid model (portfolio shift model) proposed by Evans and Lyons (2002a, 2002b) is extended to analyze a data set of every quarter of an hour currency order flow and currency exchange rate fluctuations of Thai Baht (THB) against the US$ for the period of six years (January 2010 to December 2015). To reflect the pressure of currency excess demand, the authors construct a measure of currency order flow in the Thailand currency exchange market. Vector autoregression model is applied to estimate the effectual role of currency order flow in the determination of exchange rate for the THB against the US$. Findings Currency order flow indeed accounted for a sizeable and significant portion of the fluctuations in the THB and the US$ exchange rate. Originality/value Insomuch that, the results show that currency order flow has significant explanatory power in the emerging markets economy to capture the THB exchange rate variability, and it then brings to the attention of the Thailand Monetary Authority the importance that should be attached to the market microstructure.

Unlocking the secrets of exchange rate determination in Malaysia: A Game-Changing hybrid model

“…argue that interest rate differential contains information on impeding changes in the exchange rate movement that affect the forex market at high-frequency data. In a similar way [ 21 , 22 , 51 ], confirm that the rising interest rate differential led to the depreciation of the domestic currency because of lower demand. By contrast, a prominent study by Ref.…”

“…[ 18 ] documented that the exchange rate appreciation is due to an increase in order flow volume and positively traded transactions. Extensive empirical studies have supported the positive linkage between order flow and exchange rates in the shorter period [ [19] , [20] , [21] , [22] ]. In contrast, past studies lack considerable evidence of the long-run cointegrating association between order flow and exchange rate [ [23] , [24] , [25] ].…”

Determinants of Exchange Rate: A Review Based Study

“…However, there are several microstructure factors as well which could result in variations in the exchange rate. Studies dealing with microstructure variables are relatively sparse (Zhang & MacDonald, 2016;Anifowose et al, 2017). Zhang & MacDonald (2016) examines how macro news announcements and order flow information impact exchange rate return volatility and whether there is any interaction between macro news and private information.…”

“…Overall, the study concludes that microstructure order flow information can explain short run variations in exchange rate returns and macroeconomic news is responsible for medium and long run variations. Additionally, Anifowose et al (2017) investigates the relationship between currency order flow and exchange rate movements between Thailand/ US dollar. They draw attention towards the unique characteristic of microstructure factors that even when same information is sent out to all market participants it is perceived and interpreted differently by every participant.…”

Modeling the relationships among gold price, oil price, foreign exchange, and the stock market index in Thailand

“…The baht exchange rate (baht per US dollar) has appreciated over the period since 2001. In addition, the pattern of the baht exchange rate after the global financial crisis of 2008-2009 was relatively stable following the constant currency order flows during such period(Anifowose et al, 2017). For the international gold price (US dollars per ounce), gold is considered as a safe haven in times of high-level economic policy uncertainties in the world during the period before the global financial crisis of 2008-2009 such that the gold price was positively related to the global economic policy uncertainty during the period(Beckmann et al, 2017).…”