Market response to news: rationality and conformism in an euro-dollar exchange rate model

Gabriella Cagliesi, Antonio Carlo Francesco Della Bina and Massimo Tivegna

No 11195, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: This paper examines the determinants of the Euro/US Dollar exchange rate during the 2003-2011 period to investigate the possible effects of the financial crisis on dynamics of the Euro-Dollar rate. We use an EGARCH (3,1) news-type model with thrice-daily frequency data to represent three temporal trading zones with unscheduled news in addition to the traditional scheduled macroeconomic news. In line with some behavioral finance insights, we find that when comparing pre-crisis and post crisis periods there are noticeable differences in agents’ attitudes across the three trading time zones in terms of asymmetric reactions, over/under-reactions to news, policies and fundamentals variables.

Keywords: exchange rate; macroeconomic announcements; behavioural finance (search for similar items in EconPapers)
Date: 2014-02
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