The paper examines short-run exchange rate
dynamics in a small open economy, Taiwan, based on the microstructure framework
of foreign exchange markets. This study develops a contrarian imbalance-based
trading strategy given the negative interaction between lagged order imbalances
and current returns. We find that
imbalance-based strategy with large order
consistently outperforms the benchmark, and
an asymmetry trading performance in the currency appreciations versus
depreciations period. These results could interpret as reflecting the official
intervention behavior. Furthermore, the performance of our daily
strategies could dominate that of the intraday strategies. A nested causality approach, which examines
the dynamic return-order imbalance relationship during the price-formation
process, confirms the results.
numbers: G12; G14; G15
Keywords: order imbalance, intraday, NTD/USD exchange rate, causality relation.