The effects of news on exchange rates when the risk premium is considered

Van Newby

Applied Financial Economics, 2002, vol. 12, issue 2, 147-153

Abstract: Poor performance of forward exchange rates to predict future spot rates has caused researchers to analyse other approaches to exchange rate determination. One such approach is to treat exchange rates as prices of foreign currency assets. Thus, these prices should be highly sensitive to new information. This paper analyses, as news variables, unanticipated changes in the USA and home country money supplies, incomes, and interest rates. Two different methods are used to account for the unobservable risk premium. Results suggest that news does not significantly influence exchange rates for the four countries involved-Germany, Italy, Canada and Japan. Possible reasons are discussed.

Date: 2002
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DOI: 10.1080/09603100110090109

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