Private Information in Currency Markets

60 Pages Posted: 25 Jan 2016 Last revised: 20 Mar 2018

See all articles by Alexander Michaelides

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

George Nishiotis

University of Cyprus-Faculty of Economics and Management-Department of Accounting and Finance

Date Written: January 24, 2018

Abstract

Using daily abnormal currency returns for the universe of countries with flexible exchange rates, we document local currency depreciations ahead of unscheduled, public, sovereign debt downgrade announcements. Consistent with the private information hypothesis, the effect is stronger in lower institutional quality countries and holds after we control for concurrent public information and for publically available rumors about the forthcoming downgrades. Our results persist when abnormal currency returns are adjusted for global carry and dollar risk factors, world equity and bond returns as well as local stock market returns. Finally, the currency depreciations are permanent, providing evidence for a link between fundamentals and currency markets.

Keywords: sovereign debt ratings, foreign exchange, institutional quality, information leakage, TRMI

JEL Classification: G14, G15, G24

Suggested Citation

Michaelides, Alexander and Milidonis, Andreas and Nishiotis, George P., Private Information in Currency Markets (January 24, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2720172 or http://dx.doi.org/10.2139/ssrn.2720172

Alexander Michaelides

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

George P. Nishiotis

University of Cyprus-Faculty of Economics and Management-Department of Accounting and Finance ( email )

Cyprus

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