Connectedness between order flows and exchange rate movements—An empirical analysis of calm and turbulent conditions in the Ghanaian foreign exchange market

The Ghanaian FX market has undergone significant transformation over the past decade, characterised by rising trading volumes and episodes of exchange rate volatility. This study utilises high-frequency daily data from 2018 to 2023, covering both calm and turbulent market conditions. Employing the BK-18 spillover index within a time–frequency framework, the analysis uncovers interconnectedness between order flows and exchange rates, with dynamics largely driven by short-term interactions and a regime-dependent relationship. Under calm market conditions, exchange rates, particularly USD/GHS tend to drive trading behaviour, while order flows play a prominent role in influencing exchange rate movements during turbulent periods, especially in the short to medium term. Across currency pairs, the EUR/GHS emerges as a dominant transmitter of shocks, exerting spillover effects, thereby highlighting the importance of cross-currency linkages in the Ghanaian FX market. Furthermore, the findings indicate that connectedness intensifies during periods of market stress and increased interdependence consistent with liquidity constraints and uncertainty. Overall, the study underscores the importance of market microstructure factors in explaining exchange rate behaviour beyond traditional macroeconomic fundamentals. These findings carry important implications for FX policy design, market surveillance, and regulatory oversight in Ghana, particularly in the context of managing volatility and strengthening market resilience. By examining the connectedness between order flows and exchange rates, this study contributes to the growing literature on FX market microstructure in emerging and frontier markets, where market depth, liquidity, price discovery, and information asymmetry differ significantly from those observed in advanced economies. The findings have important implications for financial market regulators, central banks, FX dealers, and other market participants. Understanding this dynamic relationship through the lens of regime shifts can enhance FX market surveillance, improve the assessment of liquidity conditions, and support the design of more effective foreign exchange intervention strategies. This research offers significant value to all participants in Ghana’s foreign exchange (FX) market, including policymakers, regulators, and FX traders. By uncovering the underlying microstructure of the Ghanaian FX market, it deepens understanding of market behavior and dynamics. The findings have practical implications for trading strategies, market monitoring, and the development of effective regulatory and policy frameworks.