Macroeconomic News, Order Flows and Exchange Rates
47 Pages Posted: 22 Jun 2007
Date Written: November 19, 2006
Abstract
In textbook models of exchange rate determination, the news contained in public information announcements is directly impounded into prices with there being no role for trading in this process of information assimilation. This paper directly tests this theoretical result using transaction level exchange rate return and trading data and a sample of scheduled macroeconomic announcements. The main result of the paper is that even information that is publicly and simultaneously released to all market participants is partially impounded into prices via the key micro-level price determinant order flow. We quantify the role that order flow plays and find that approximately one third of price relevant information is incorporated via the trading process.
Keywords: Exchange rates, market microstructure, order flow
JEL Classification: F41, G15
Suggested Citation: Suggested Citation
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