What are the Origins of Foreign Exchange Movements?

Martin D. D. Evans(Georgetown University and NBER) ()
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Martin D. D. Evans(Georgetown University and NBER): Department of Economics, Georgetown University, http://www9.georgetown.edu/faculty/evansm1/
Authors registered in the RePEc Author Service: Martin Evans

Working Papers from Georgetown University, Department of Economics

Abstract: This paper uses a new transactions data set on the inter bank foreign exchange market to examine the origins of spot exchange rate movements. The data provide a comprehensive picture of trading activity and allow me to examine the contribution of public news to spot rate dynamics over hours, days, and weeks. Contrary the presumption of macroeconomic exchange rates models, I find that public news only accounts for a fraction of exchange rate volatility over the whole frequency spectrum. In particular, I estimate that less that 50\% of the variance of spot rate changes at very high frequencies is attributable to public news. At daily and weekly frequencies, changes in the spot rate understate the effects of public news by 20 to 40 percent because the cumulative effects of independent public and private news exert offsetting effects. These findings suggest one reason for the poor performance of macroeconomic exchange rate models; namely their exclusive focus on public

Date: 2005-05-06
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ifn
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Citations: View citations in EconPapers (6)

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