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. | The imbalance-based trading strategies on Taiwan exchange rate market
