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The Imbalance-Based Trading Strategies on Taiwan Exchange Rate Market

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  • Pei-wen Chen
  • Han-Ching Huang
  • Yung-chern Su

Abstract

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 imbalance 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. JEL classification numbers: G12; G14; G15

Suggested Citation

  • Pei-wen Chen & Han-Ching Huang & Yung-chern Su, 2019. "The Imbalance-Based Trading Strategies on Taiwan Exchange Rate Market," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 9(4), pages 1-8.
    • Handle: RePEc:spt:apfiba:v:9:y:2019:i:4:f:9_4_8
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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