Order Flow and Exchange Rate Co-Movement

This paper investigates how order flows drive dynamic co-movements of exchange rates. We allow for asymmetric correlation responses to positive/negative shocks, control for structural breaks, bid-ask spreads and volatility effect of order flows, employ alternative order flow measures, and consider different intraday frequencies. Order flow differences between five major currencies have significant negative effects on the co-movements of their exchange rates vis-à-vis the US dollar. There are two structural breaks in the correlation structures, due to the 2007 GFC and the 2010 EDC. Joint positive shocks are followed by greater comovements of the exchange rates studied than joint negative shocks