The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements

47 Pages Posted: 5 Dec 2003

See all articles by Jon Faust

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance; Johns Hopkins University

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Shing-Yi Wang

Yale University - Department of Economics

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: October 2003

Abstract

Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets - exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.

Keywords: data releases, exchange rates, uncovered interest parity, overshooting

JEL Classification: C22, F31

Suggested Citation

Faust, Jon and Rogers, John H. and Wang, Shing-Yi and Wright, Jonathan H., The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements (October 2003). FRB International Finance Discussion Paper No. 784. Available at SSRN: https://ssrn.com/abstract=465323 or http://dx.doi.org/10.2139/ssrn.465323

Jon Faust (Contact Author)

Board of Governors of the Federal Reserve - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2328 (Phone)
202-736-5638 (Fax)

Johns Hopkins University

Baltimore, MD 20036-1984
United States

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Shing-Yi Wang

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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