 Exchange rate determination and dynamics in China: A market microstructure analysisZhichao Zhang (), Frankie Chau and Wenting Zhang International Review of Financial Analysis, 2013, vol. 29, issue C, 303-316 Abstract: This paper provides a market-microstructure analysis of exchange rate dynamics in the Chinese foreign exchange market using a vector autoregressive (VAR) modeling framework. An index of order flow is constructed in the Chinese context to reflect excess demand pressure in the foreign exchange market. The VAR model is then estimated to examine whether, and to what extent, order flow influences the long-term level and short-term fluctuations of the Chinese exchange rate. Focusing on the relationship between cumulative order flow and the exchange rate of the Chinese renminbi (RMB) against the US dollar, we find that order flow as a measure of excess demand pressure explains a significant part of the fluctuations in the RMB–dollar exchange rate. Specifically, the results show that there is a long-term cointegrating relationship among the order flow, macro factors and the exchange rate. Overall, these findings are important in understanding the role of order flow in exchange rate determination and bear important implications for practitioners and market regulators. Keywords: Exchange rates; Microstructure; Order flow; Foreign exchange (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:29:y:2013:i:c:p:303-316 DOI: 10.1016/j.irfa.2012.08.005 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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