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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

Abstract: 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)
Pages: 37
Date: 2017-04-07
New Economics Papers: this item is included in nep-ifn, nep-mst and nep-opm
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