Order flow and randdollar exchange rate dynamics

Aadila Hoosain, Alta Joubert and Alain Kabundi ()

No 8169, Working Papers from South African Reserve Bank

Abstract: This paper uses the microstructure approach for the South African foreign exchange market to determine the impact of order flow on the rand/US dollar exchange rate over the short and long term. A hybrid model which combines microeconomic and macroeconomic fundamental determinants of the exchange rate has been adopted. The analysis uses monthly series from January 2004 to December 2016 and finds that order flow explains movements in the exchange rate, both in the short and in the long term. The speed of adjustment from short-term deviations is relatively slow. The results based on the rolling-window estimation of the long-run model provide evidence of a changing relationship between order flow and the exchange rate. Consistent with the literature, the results show that the rand/dollar exchange rate reacts to fundamental variables only in the long term. Unlike Meese and Rogoff (1983), who postulate that the best way to estimate the exchange rate over the short term is with a random walk model, the current study shows that the microstructure approach can be exploited to explain short-term dynamics in the exchange rate.

Date: 2017-12-20
New Economics Papers: this item is included in nep-mon and nep-mst
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.resbank.co.za/content/dam/sarb/publicat ... 2017/8169/WP1703.pdf Revision (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Status read failed: An existing connection was forcibly closed by the remote host.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rbz:wpaper:8169

Access Statistics for this paper

More papers in Working Papers from South African Reserve Bank Contact information at EDIRC.
Bibliographic data for series maintained by Jessica VanWyk ().