Private information in currency markets

Alexander Michaelides, Andreas Milidonis () and George Nishiotis

Journal of Financial Economics, 2019, vol. 131, issue 3, 643-665

Abstract: Using daily abnormal currency returns for the universe of countries with flexible exchange rates, we show local currency depreciations ahead of unscheduled, public sovereign debt downgrade announcements. Consistent with the private information hypothesis, the effect is stronger in lower institutional quality countries and holds after we control for concurrent public information and for publicly available rumors about the forthcoming downgrades. Our results persist when abnormal currency returns are adjusted for global carry and dollar risk factors, world equity and bond returns, as well as local stock market returns. Finally, the currency depreciations are permanent, providing evidence for a link between fundamentals and currency markets.

Keywords: Sovereign debt ratings; Foreign exchange; Institutional quality; Information leakage; TRMI (search for similar items in EconPapers)
JEL-codes: G14 G15 G24 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:3:p:643-665

DOI: 10.1016/j.jfineco.2018.08.012

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