The Sign Switch Effect of Macroeconomic News in Foreign Exchange Markets

40 Pages Posted: 19 Jan 2013 Last revised: 1 Jun 2015

See all articles by Walid Ben Omrane

Walid Ben Omrane

Brock University - Department of Finance, Operations and Information Systems (FOIS)

Tanseli Savaser

Vassar College - Department of Economics

Date Written: February 15, 2015

Abstract

We examine an unusual episode in the behavior of the euro, pound and yen exchange rate markets when the dollar appreciated (depreciated) against the three major currencies, in response to unfavorable (favorable) US growth news during the global financial crisis. Contrary to the previous findings, we show that, for each currency pair, only a small subset (about a third) of the most significant macro news effects reversed sign, primarily announcements regarding consumption, credit, labor and housing markets. Our results reveal that announcement chronology within a month matters, in that specifically the earliest releases within an indicator category exhibit sign asymmetry. We explore possible sources of the switch in the exchange rate reaction during this period and find that fluctuations in market risk and carry trade returns explain most of the variation in the news response coefficient signs.

Keywords: Financial crisis, exchange rates, US dollar, macroeconomic news, high-frequency data

JEL Classification: F31, F4, G1

Suggested Citation

Ben Omrane, Walid and Savaser, Tanseli, The Sign Switch Effect of Macroeconomic News in Foreign Exchange Markets (February 15, 2015). Available at SSRN: https://ssrn.com/abstract=2202911 or http://dx.doi.org/10.2139/ssrn.2202911

Walid Ben Omrane

Brock University - Department of Finance, Operations and Information Systems (FOIS) ( email )

Ontario, L2S 3A1
Canada

Tanseli Savaser (Contact Author)

Vassar College - Department of Economics ( email )

124 Raymond Avenue
Poughkeepsie, NY 12604
United States

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