How Is Macro News Transmitted to Exchange Rates?

Martin Evans and Richard Lyons ()
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Martin Evans and Richard Lyons: Department of Economics, Georgetown University, http://www9.georgetown.edu/faculty/evansm1/

Working Papers from Georgetown University, Department of Economics

Abstract: Macro news can affect currency prices directly, and indirectly via order flow. Past research shows that the direct effects of scheduled macro news account for less than 10 percent of daily price variance. This paper shows that the arrival of macro news can account for more than 30 percent of daily price variance. Two features of our analysis account for this finding: (i) We consider the broad spectrum of macro news items that market participants actually observe, not just scheduled announcements. (ii) We allow the arrival of news to affect prices indirectly via its impact on the volatility of order flow. Our analysis shows that order flow variations contribute more to currency price dynamics following the arrival of public macro news than at other times. This is not consistent with news effects being common knowledge that is impounded in price directly. Roughly two-thirds of the total effect of macro news on the DM/$ exchange rate is transmitted via order flow.

Keywords: Information; Microstructure; Announcements; Heterogeneity. (search for similar items in EconPapers)
Date: 2007-07-10
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