Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange
Board of Governors of the Federal Reserve System
Torben G. Andersen
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); University of Aarhus - CREATES
Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)
Francis X. Diebold
University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)
PIER Working Paper No. 02-011
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.
Number of Pages in PDF File: 38
Keywords: Exchange Rates, Macroeconomic News Announcements, Jumps, Market Microstructure, High-Frequency Data, Expectations Data, Anticipations Data, Order Flow, Asset Return Volatility, Forecasting
Date posted: May 17, 2002
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