Working Paper: NBER ID: w8959
Authors: Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Clara Vega
Abstract: Using a new dataset consisting of six years of real-time exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements), we characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and the Euro. In particular, we find that announcement surprises (that is, divergences between expectations and realizations, or 'news') produce conditional mean jumps; hence high-frequency exchange rate dynamics are linked to fundamentals. The details of the linkage are intriguing and include announcement timing and sign effects. The sign effect refers to the fact that the market reacts to news in an asymmetric fashion: bad news has greater impact than good news, which we relate to recent theoretical work on information processing and price discovery.
Keywords: macroeconomic announcements; exchange rates; price discovery; high-frequency data
JEL Codes: F3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| announcement surprises (E60) | conditional mean jumps in exchange rates (F31) |
| macroeconomic expectations (E66) | exchange rate movements (F31) |
| timing of announcements (G14) | exchange rate response (F31) |
| bad news (Y70) | exchange rate response (F31) |
| good news (Y60) | exchange rate response (F31) |