The central bank in market efficiency: The case of Taiwan

•Contemporaneous order imbalances have positive influences on NTD/USD returns.•A negative relation exists between lagged-one order imbalance and NTD/USD returns.•Volatility affects explanation power of order imbalances on returns.•Volatility does not improve the predictability of order imbalances on returns.•Central bank could use orders intervention to facilitate exchange rate stability.

This paper investigates the empirical relation between order imbalance and intraday NTD/USD exchange rate dynamics. Using one-year high frequency data, we demonstrate that interbank order imbalances have substantial explanatory power for concurrent exchange rate returns both on the daily and intraday bases. More importantly, we find that lagged-one order imbalances have a predictive negative effect on current returns. Further, we trace the predictability of returns using order imbalances over various intervals to investigate the intraday market efficiency. We show that the weak-form efficiency appears to prevail over intervals of 15 to 60 min in the NTD/USD exchange rate market.