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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.

Publication Type:	Article
Additional Information:	This is the peer reviewed version of the following article: Duffuor, K., Marsh, I. W. & Phylaktis, K. (2012). Order flow and exchange rate dynamics: an application to emerging markets. International Journal of Finance and Economics, 17(3), pp. 290-304, which has been published in final form at https://dx.doi.org/10.1002/ijfe.451. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Publisher Keywords:	order flow; foreign exchange markets; exchange rates; forex microstructure
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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