Order flow, bid–ask spread and trading density in foreign exchange markets

Macroeconomic and market microstructure modelling of Ugandan exchange rate

“…Further, the statistical insignificance of the long-run coefficient of the bid-ask spread variable may indicate that liquidity in the Ugandan foreign exchange market has improved over time which is consistent with Uganda's commitment to financial sector development as part of prudent macroeconomic management over the floating exchange rate regime (Byaruhanga et al, 2010). Although the coefficient on the bidask spread is larger than that on order flow, the statistical insignificance of the parameter suggests that in contrast to the findings of Chen et al (2012), we find that order flow is the most important market microstructure channel of information transmission and aggregation influencing exchange rate dynamics in Uganda. The coefficient of the GFC dummy variable is positive and highly statistically significant at the 5% level.…”

“…This result is consistent with Opolot and Anguyo (2007) who find that the interest rate differential has an insignificant effect on the UGX/USD exchange rate and contrasts with the results of Egesa (2009) who shows a negative and significant effect of the interest rate differential. Similarly, Chen et al (2012) found a negative but insignificant effect of interest rate differentials for high trading density currencies as did Chinn and Moore (2011) for the USD/EUR and USD/JPY. However our results contrast with Odedokun's (1997) evidence of positive and significant interest rate effects for Sub-Saharan countries and Chen et al (2012) who suggest that a positive coefficient sign is a common finding for low trading density currencies.…”

“…Bessembinder (1994) examined quotations and bid-ask spreads in the wholesale foreign exchange market and found that bidask spreads of major currency pairs widen with forecasts of inventory price risk and with a measure of liquidity costs. Chen et al (2012) show that while order flow plays an important information aggregation and transmission role, particularly in high trading currencies, liquidity as measured by the realised bid-ask spread is important in the determination of the foreign exchange rate, especially for low trading currencies. Now, with liberalization and development of foreign exchange and assets markets, components of the current and capital account, including the stock of foreign exchange reserves and central bank intervention, have also become important in determining the exchange rates.…”

Prediction of Malaysian Exchange Rate Using Microstructure Fundamental and Commodities Prices: A Machine Learning Method

“…The past studies investigated that bid-ask spreads have significant positive impact on exchange rate. Moreover, liquidity as measured by the bid-ask spread is important in the determination of the foreign exchange rate, especially for low trading currencies [21]. In line with these arguments, a recent study by Katusiime, et al [22] confirmed the positive association between the bid-ask spread and the exchange rate at short run and long run horizons in Ugandan economy during the period 1995M1 to 2013M3.…”

Cross‐asset Style Momentum

“…15 15 See Corwin and Schultz (2012) and Chen et al. (2012) for the recent estimates of equity and FX transaction cost. …”