This paper extends the literature on the linkage between order flows and exchange rates from the univariate to the multivariate framework. We examine how order flow differentials drive exchange rate co-movements using data on five major exchange rates and at three different intraday frequencies. We also control for bid-ask spreads and the possible effects of order flow on returns and return volatility, and employ alternative order flow measures. Our results show that the effect of order flow on exchange rate co-movements is significantly negative during the tranquil period but can become positive during the turbulent period. This negative effect lessens as the intraday frequency lowers. Generally, over the entire sample period, exchange rate correlations are stronger during joint appreciations than joint depreciations.
Xiaoming Li graduated with a PhD from University of Strathclyde, and worked as a postdoctoral research fellow at University of Sheffield, before joining Massey University in 1997. Since then, he has taught economics at the undergraduate and postgraduate levels, and supervised/examined research reports, MBS theses and PhD theses from both within and outside Massey University. Li’s research interests straddle macroeconomics, financial economics, international economics/finance and Chinese economy. He has published extensively in journals, books and international conferences, has received several prestigious awards/prizes/grants, and has served as a reviewer for many economics/finance journals and on several editorial boards.