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Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction

Romain Lafarguette, Arnaud Mehl () and Barry Eichengreen ()

No 2017/091, 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: WP; interest rate; submarine cable; Technology; Submarine Fiber-Optic Cables; Foreign Exchange Market; Macro Announcements; cable connection; standard deviation; S&P 500; currencies of country; fiber optic cable; trading strategy; market participant; policy news; cable network; market reaction; trading location; policy interest rate news; Central bank policy rate; Currencies; Exchange rates; Currency markets; Global (search for similar items in EconPapers)
Pages: 37
Date: 2017-04-07
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Handle: RePEc:imf:imfwpa:2017/091