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Dynamics of exchange rate determination and currency order flow in the Thailand foreign exchange market: An empirical analysis

Abolaji Daniel Anifowose (Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia)
Izlin Ismail (Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia)
Mohd Edil Abd Sukor (Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia)

Journal of Chinese Economic and Foreign Trade Studies

ISSN: 1754-4408

Article publication date: 5 June 2017

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.

Keywords

Citation

Anifowose, A.D., Ismail, I. and Abd Sukor, M.E. (2017), "Dynamics of exchange rate determination and currency order flow in the Thailand foreign exchange market: An empirical analysis", Journal of Chinese Economic and Foreign Trade Studies, Vol. 10 No. 2, pp. 143-161. https://doi.org/10.1108/JCEFTS-11-2016-0031

Publisher

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Emerald Publishing Limited

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