Central Bank Communication Choices: Adverse Selection, Volatility and Liquidity in a Market With Fast and Slow Traders

35 Pages Posted: 12 Feb 2021

See all articles by Hedi Benamar

Hedi Benamar

Board of Governors of the Federal Reserve System

Alain Chaboud

Board of Governors of the Federal Reserve System

Clara Vega

Board of Governors of the Federal Reserve System

Date Written: February 5, 2021

Abstract

We study the impact of different central bank communication practices on the trading behavior and profitability of fast and slow traders in the foreign exchange market. We focus, in particular, on how the Bank of Japan's practice of introducing some randomness to the time at which it releases its monetary policy statement affects the behavior and profitability of high-frequency traders, and how that differs from the impact of the fixed release time used by the Federal Reserve and the European Central Bank. We also analyze the relative impact on fast and slow trader behavior of central bank press conferences and statement releases. We relate our findings to the broader discussion of how information asymmetry affects fast and slow traders in a market in which they coexist, and how market quality is affected by their interaction.

Keywords: Monetary policy, public information, high frequency traders, random release times

JEL Classification: C53, D83, E27, E37, E44, E47, E5, G1

Suggested Citation

Benamar, Hedi and Chaboud, Alain and Vega, Clara, Central Bank Communication Choices: Adverse Selection, Volatility and Liquidity in a Market With Fast and Slow Traders (February 5, 2021). Available at SSRN: https://ssrn.com/abstract=3779912 or http://dx.doi.org/10.2139/ssrn.3779912

Hedi Benamar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.hedibenamar.net

Alain Chaboud

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452 3756 (Phone)

Clara Vega (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/research/staff/vegaclarax.htm

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