The effects of macroeconomic 'news' on high frequency exchange rate behaviour

This papers studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. The news content of each announcement is extracted using a set of market expectation figures supplied by MMS International. By using data sampled at a high (5 minute) frequency we are able to identify systematic impacts of most announcements on the exchange rate change in the 15 minutes post-announcement. The impacts of ‘news' on the exchange rate, however, can be seen to lose significance very quickly when the observation horizon for the exchange rate is increased, so that for most announcements there is little effect of ‘news' on the exchange rate change by the end of the three hours immediately after release. Both the responses to U.S. and German ‘news' are broadly consistent with a monetary authority ‘reaction function' hypothesis, i.e., the market expects the Fed or the Bundesbank to respond to ‘news' on increased real activity, for example, by raising short term interest rates in order to head off the possibility of future inflation. Further, the use of German data allows us to examine two questions the previous literature could not tackle, because, unlike U.S. announcements, German announcements are not scheduled. First, we show that the time-pattern of the reaction of the exchange rate to the U.S. scheduled announcements is different from the reaction to the German non-scheduled announcements, the former being much quicker. Second, we are able to examine the effect on the exchange rate change of the proximity of other events to the announcement. Results show that German ‘news' is most influential when released just prior to a Bundesbank council meeting. Finally, subsidiary results demonstrate the efficiency of the intra-day FX market with respect to these announcements and map the pattern of volatility these releases cause

The influence of actual and unrequited interventions

Intervention operations are used by governments to manage their exchange rates but officials rarely confirm their presence in the market, leading inevitably to erroneous reports in the financial press. There are also reports of what we term, unrequited interventions, interventions that the market expects but do not materialize. In this paper we examine the effects of various types of intervention news on intra-day exchange rate behaviour. We find that unrequited interventions have a statistically significant influence on returns, volatility and order flow, suggesting that the expectation of intervention, even when governments do not intervene, can affect currency values. Copyright © 2007 John Wiley & Sons, Ltd.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/56025/1/326_ftp.pd

Interest Rate Volatility and Risk Management: Evidence from CBOE Treasury Options

This paper investigates US Treasury market volatility and develops new ways of dealing with the underlying interest rate volatility risk. We adopt an innovative approach which is based on a class of model-free interest rate volatility (VXI) indices we derive from options traded on the CBOE. The empirical analysis indicates substantial interest rate volatility risk for medium-term instruments which declines to the levels of the equity market only as the tenor increases to 30 years. We show that this risk appears to be priced in the market and has a significant time-varying relationship with equity volatility risk. US Treasury market volatility is appealing from an investment diversification perspective since the VXI indices are negatively correlated with the levels of interest rates and of equity market implied volatility indices, respectively. Although VXI indices are affected by macroeconomic and monetary news, they are only partially spanned by information contained in the yield curve. Motivated by our results on the magnitude and the nature of interest rate volatility risk and by the phenomenal recent growth of the equity volatility derivative market, we propose the use of our VXI indices as benchmarks for monitoring, securitizing, managing and trading interest rate volatility risk. As a first step in this direction, we describe a framework of one-factor equilibrium models for pricing VXI futures and options on the basis of empirically favored mean-reverting jump-diffusions

The Effects of Macroeconomic News on High Frequency Exchange Rate Behaviour

This paper studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. The new content of each announcement is extracted using a set of market expectation figures supplied by MMS International. By using data sampled at a high (5 Minute) frequency we are able to identify systematic impacts of most announcements on the exchange rate change in the 15 minutes post-announcement. The impacts of news on the exchange rate, however, can be seen to lose significance very quickly when the observation horizon for the exchange rate is increased, so that for most announcements there is little effect of news on the exchange rate change by the end of the three hours immediately after release. Both the responses to U.S. And German news are broadly consistent with a monetary authority reaction function hypothesis, i.e., the market expects the Fed or the Bundesbank to respond to news on increased real activity, for example, by raising short term interest rates in order to head off the possibility of future inflation. Further, the use of German data allows us to examine two questions the previous literature could not tackle, because, unlike U.S. announcements, German announcements are not Scheduled. First, we show that the time-patten of the reaction of the exchange rate to the U.S. scheduled announcements is different from the reaction to the German non-scheduled announcements, the former being much quicker. Second, we are able to examine the effect on the exchange rate change of the proximity of other events to the announcement. Results show that German news is most influential when released just prior to a Bundesbank council meeting Finanlly subsidiary results demonstrate the efficiency of the intra-day FX market with respect to these announcements and map the pattern of volatility these releases cause.

The effects of macroeconomic `news' on high frequency exchange rate behaviour

SIGLEAvailable from British Library Document Supply Centre-DSC:5300.405(258) / BLDSC - British Library Document Supply CentreGBUnited Kingdo

Predicting the Short-Term Market Reaction to Asset Specific News: Is Time Against Us?

The efficient market hypothesis states that investors immediately incorporate all available information into the price of an asset to accurately reflect its value at any given time. The sheer volume of information immediately available electronically makes it difficult for a single investor to keep abreast of all information for a single stock, let alone multiple. We aim to determine how quickly investors tend to react to asset specific news by analysing the accuracy of classifiers which take the content of news to predict the short-term market reaction. The faster the market reacts to news the more cost-effective it becomes to employ content analysis techniques to aid the decisions of traders. We find that the best results are achieved by allowing investors in the US 90 minutes to react to news. In the UK and Australia the best results are achieved by allowing investors 5 minutes to react to news