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Exchange rate response to macronews: Through the lens of microstructure

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  • Savaser, Tanseli

Abstract

This study investigates the microeffects of macronews using customer price-contingent orders (i.e. stop-loss and take-profit orders) data from a large foreign exchange dealing bank in the pound/dollar market. Results reveal that price-contingent order placement intensifies 3-5 h prior to the news events. I examine the link between this surge in order placement and the exchange-rate jump following the announcement. I find that price-contingent orders can enhance our ability to explain post-release exchange-rate returns by half. Furthermore, the estimated effect of orders is orthogonal to the news surprises. This implies that there may be a component of the news response that purely reflects institutional features such as order types and not necessarily the content of the public information itself.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 21 (2011)
Issue (Month): 1 (February)
Pages: 107-126

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Handle: RePEc:eee:intfin:v:21:y:2011:i:1:p:107-126

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Keywords: Exchange rates Public news Currency market Microstructure Order flow High frequency Stop-loss Price-contingent trading Positive-feedback trading;

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Cited by:
  1. Michael King & Carol Osler & Dagfinn Rime, 2012. "The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward," Working Papers 54, Brandeis University, Department of Economics and International Businesss School.
  2. Nikola Gradojevic & Christopher J. Neely, 2008. "The dynamic interaction of order flows and the CAD/USD exchange rate," Working Papers 2008-006, Federal Reserve Bank of St. Louis.
  3. Christopher J. Neely, 2011. "A survey of announcement effects on foreign exchange volatility and jumps," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 361-385.
  4. Christopher J. Neely & Brett W. Fawley, 2011. "Capital flows and Japanese asset volatility," Working Papers 2011-034, Federal Reserve Bank of St. Louis.
  5. Osler, Carol & Savaser, Tanseli, 2011. "Extreme returns: The case of currencies," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2868-2880, November.
  6. Christopher J. Neely & S. Rubun Dey, 2010. "A survey of announcement effects on foreign exchange returns," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 417-464.
  7. Deniz Erdemlioglu & Sébastien Laurent & Christopher J. Neely, 2012. "Econometric modeling of exchange rate volatility and jumps," Working Papers 2012-008, Federal Reserve Bank of St. Louis.

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