Thick vs. Thin-Skinned; Technology, News, and Financial Market Reaction
Barry Eichengreen (),
Romain Lafarguette and
Arnaud Mehl ()
No 17/91, IMF Working Papers from International Monetary Fund
We study the impact of technology on the reaction of financial markets to information, focusing on the foreign exchange market. We contrast the “thin-skinned” view that technological improvements cause markets to react more to new information with the “thick-skinned” view that they react less. We pinpoint exogenous technological changes using the timing of the connection of countries via the submarine fiber-optic cables used for electronic trading. Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned” hypothesis. This is in line with the view that technology eases access to information and reduces trend-following behavior. According to our estimates, cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.
Keywords: Information technology; Financial markets; Foreign exchange markets; Exchange rates; Monetary policy; Technology, Submarine Fiber-Optic Cables, Foreign Exchange Market, Macro Announcements, General (search for similar items in EconPapers)
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