The intraday relationship between order flow and exchange rates in the foreign exchange market

Abstract

This master thesis examines the relationship between order flow and exchange rate returns for the EUR/NOK, USD/GBP, and USD/ZAR currency pairs. It investigates this relationship on a general level by looking at the explanatory power of order flow using a hybrid model in contrast to a traditional macro model. It continues with investigating how this relationship varies between liquid and less liquid periods, by specifically looking at how it varies throughout the day. The analysis is extended by looking at order flow impact during the world financial crisis and on holidays. The overall results find no distinct pattern in how the liquidity in the market affects order flow´s impact on exchange rates.