The Impact of Macroeconomic News on Exchange Rate Volatility
Bank of Finland Discussion Paper No. 24/2004
46 Pages Posted: 9 Jan 2005
Date Written: July 12, 2004
This study investigates the impact of new information on the volatility of exchange rates. The impact of scheduled US and European macroeconomic news on the volatility of USD/EUR 5-minute returns was tested by using the Flexible Fourier Form method. The results were consistent with earlier studies. Macroeconomic news increased volatility significantly, and news on the United States was the most important. The much-tested hypothesis of bad news having a greater impact on volatility was re-confirmed in this study. The announcements were also divided into two categories, the first containing the news that gave conflicting information on the state of the economy (bad and good news at the same time) and the other containing the news that was consistent (where either good or bad news was announced). Conflicting news was found to increase volatility significantly more than consistent news. The impact of 'no-surprise' news was also tested. Even news the forecast of which was equal to an announcement seemed to increase volatility.
Keywords: Exchange rates, microstructure theory, volatility, news
JEL Classification: G14, C14, C12, C22
Suggested Citation: Suggested Citation