The Microstructure Of CNY Spot Foreign Exchange Market:Order Flow

The traditional macro exchange rate determination theory cannot explain that why the short-term exchange rate fluctuates.Since the micro-structure theory had been approved effective on the analysis of stock market in 1980 s,some scholars tried to use micro-structure theory to explain the foreign exchange market and got great success.The aim of these studies was to explore the influence factors of exchange rate fluctuation——such as order flows,trading mechanism,macro information or traders' expectation triggered the exchange rate fluctuated? In massive studies of microstructual theory in foreign exchange market,order flows were used widely,because order flows could be quantified in the process of the information transfering,and they could contain the private information of customers and send the information invisibly.In China's inter-bank foreign exchange market,the largest order flows come from the customers' demand for foreign exchange settlement and sale.Therefore,the order flows have two different perspectives: In the short term,when the market of RMB against to U.S.dollar keep quite stable during these times-in the first half of 2014 and March to April 2015,the value of exchange rate closed to equilibrium level.When the weak equilibrium was been broked,the RMB exchange rate fluctuated.This type of volatility was irrelevant to macro economic situation or market short-term expectation,but totally relyed on the order flows.In the long term,order flows contain some information about expectation of RMB's appreciation or depreciation,at the same time these expectations rely on the macro economic state.On this basis,the paper firstly try to confirm that if it has the stock effect and the information effect in the inter-bank spot foreign exchange market.Then the paper try to know the characteristics of the RMB foreign exchange market microstructure.At last the paper based on the order flows analyze the relationship among order flows,exchange rate and macro information,simultaneously research the roles of order flows,market makers and liquidity in the market microstructure.This dissertation use theoretic and empirical analysis and follow the problem-based researching route.This dissertation can be dividened into five parts.In particular,the structure of this dissertation is organized as follows:Chapter one is the first part which is an introduction.As the start of this paper,this part introduces the background,motif and significances of this dissertation.Then,it explains the research plan and innovation.At last,it introduces the logic frame and structure.The second part includes chapter two and three.Chapter two using literature research method and historical research method,reviews the microstructure of the foreign exchange market theory framework and the domestic foreign exchange market micrstructure.Chapter three introduces the structure of the foreign exchange market and China's foreign exchange market trading system.The third part presents empirical study which includes chapter four,chapter five and chapter six.Chapter four tries to study if there are the inventory effect and information effect in the inter-bank foreign exchange market which is as similar as other financial markets.Chapter five analyzes the relationship between order flows and short-term exchange rate fluctuations.The sixth chapter inquirys the question whether order flows are the medium for the macroeconomic fundamentals and the exchange rate fluctuations.The fourth part is chapter seven which is policy analysis.The chapter reviews the exchange rate formation mechanism reform since 2005,and gradual development of foreign currency management policy.Chapter eight is the last part which points out conclusions and future study plan.This chapter summarizes the main standpoints and conclusions of this dissertation.Finally,it points out the drawbacks and orientations that adapt to do some research in the next step.The innovations of the paper are as follows.In the research content,the most studies made by domestic and foreign scholars were the USD/EUR or USD/JPY,RMBforeign exchange market microstructure analyses were limited to reviews of the literatures.The paper uses the general theory to study the characteristics of RMB foreign exchange market microstructure.In the empirical study,the paper uses the econometric analysis method,and makes a comprehensive analysis of the problem.In practical application,from the perspective of the foreign exchange market microstructure,the paper analyze China's exchange rate system reform,and foreign exchange market system construction,in the meantime put forward to the policy recommendations.The microstructure of the foreign exchange market is a very complex study,involving international finance,macroeconomics,microeconomics,econometrics and other disciplines and fields.Because of limited time and knowledge,and limited of the research data and information,studies still exist some defects and deficiencies,and some issues related to micro structure of the foreign exchange market are not involved.However,these shortcomings provide the direction and space research in microstructure study of RMB exchange market.