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A survey of announcement effects on foreign exchange volatility and jumps

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  • Christopher J. Neely

Abstract

This article reviews, evaluates, and links research that studies foreign exchange volatility reaction to macro announcements. Scheduled and unscheduled news typically raises volatility for about an hour and often causes price discontinuities or jumps. News contributes substantially to volatility but other factors contribute even more to periodic volatility. The same types of news that affect returns—payrolls, trade balance, and interest rate shocks—are also the most likely to affect volatility, and U.S. news tends to produce more volatility than foreign news. Recent research has linked news to volatility through the former’s effect on order flow. Empirical research has confirmed the predictions of microstructure theory on how volatility might depend on a number of factors: the precision of the information in the news, the state of the business cycle, and the heterogeneity of traders’ beliefs.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2011)
Issue (Month): Sep ()
Pages: 361-385

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Handle: RePEc:fip:fedlrv:y:2011:i:sep:p:361-385:n:v.93no.5

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Keywords: Foreign exchange;

References

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  1. Michel Beine & Jérôme Lahaye & Christopher Neely & Franz Palm & Sébastien Laurent, 2007. "Central Bank intervention and exchange rate volatility: its continuous and jump components," ULB Institutional Repository 2013/10413, ULB -- Universite Libre de Bruxelles.
  2. Berger, David & Chaboud, Alain & Hjalmarsson, Erik, 2009. "What drives volatility persistence in the foreign exchange market?," Journal of Financial Economics, Elsevier, vol. 94(2), pages 192-213, November.
  3. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange?," Center for Financial Institutions Working Papers 02-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Bernd Hayo & Matthias Neuenkirch, 2012. "Domestic Or U.S. News: What Drives Canadian Financial Markets?," Economic Inquiry, Western Economic Association International, vol. 50(3), pages 690-706, 07.
  5. Tanseli Savaser, 2007. "Exchange Rate Response to Macro News: Through the Lens of Microstructure," Department of Economics Working Papers 2007-02, Department of Economics, Williams College.
  6. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  7. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," PIER Working Paper Archive 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004.
  8. Christopher J. Neely, 1998. "Target zones and conditional volatility: the role of realignments," Working Papers 1994-008, Federal Reserve Bank of St. Louis.
  9. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  10. Fabio Fornari & Carlo Monticelli & Marcello Pericoli & Massimo Tivegna, 1999. "The Impact of News on the Exchange Rate of the Lira and Long-Term Interest Rates," Temi di discussione (Economic working papers) 358, Bank of Italy, Economic Research and International Relations Area.
  11. Jérôme Lahaye & Sébastien Laurent & Christopher J. Neely, 2011. "Jumps, cojumps and macro announcements," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 893-921, 09.
  12. Christopher J. Neely, 2005. "Using implied volatility to measure uncertainty about interest rates," Review, Federal Reserve Bank of St. Louis, issue May, pages 407-425.
  13. Pearce, Douglas K. & Solakoglu, M. Nihat, 2007. "Macroeconomic news and exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(4), pages 307-325, October.
  14. Hakkio, Craig S & Pearce, Douglas K, 1985. "The Reaction of Exchange Rates to Economic News," Economic Inquiry, Western Economic Association International, vol. 23(4), pages 621-36, October.
  15. Ederington, Louis H. & Lee, Jae Ha, 1995. "The Short-Run Dynamics of the Price Adjustment to New Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 117-134, March.
  16. Kim, Suk-Joong & McKenzie, Michael D. & Faff, Robert W., 2004. "Macroeconomic news announcements and the role of expectations: evidence for US bond, stock and foreign exchange markets," Journal of Multinational Financial Management, Elsevier, vol. 14(3), pages 217-232, July.
  17. Sager, Michael J. & Taylor, Mark P., 2004. "The impact of European Central Bank Governing Council announcements on the foreign exchange market: a microstructural analysis," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1043-1051.
  18. Suk-Joong Kim, 1999. "Do macro-economic news announcements affect the volatility of foreign exchange rates? Some evidence from Australia," Applied Economics, Taylor & Francis Journals, vol. 31(12), pages 1511-1521.
  19. Michael Melvin & Christian Saborowski & Michael Sager & Mark P. Taylor, 2009. "Bank of England Interest Rate Announcements and the Foreign Exchange Market," CESifo Working Paper Series 2613, CESifo Group Munich.
  20. BAUWENS, Luc & BEN OMRANE, Walid & GIOT, Pierre, . "News announcements, market activity and volatility in the euro/dollar foreign exchange market," CORE Discussion Papers RP -1787, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  21. Yuko Hashimoto & Takatoshi Ito, 2009. "Effects of Japanese Macroeconomic Announcements on the Dollar/Yen Exchange Rate: High-Resolution Picture," NBER Working Papers 15020, National Bureau of Economic Research, Inc.
  22. Christian Conrad & Michael J. Lamla, 2010. "The High-Frequency Response of the EUR-USD Exchange Rate to ECB Communication," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1391-1417, October.
  23. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
  24. Douglas K. Pearce & V. Vance Roley, 1985. "Stock Prices and Economic News," NBER Working Papers 1296, National Bureau of Economic Research, Inc.
  25. 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.
  26. Patricia Chelley-Steeley & Nikolaos Tsorakidis, 2009. "Volatility changes in drachma exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 19(11), pages 905-916.
  27. Laakkonen, Helinä & Lanne, Markku, 2009. "The Relevance of Accuracy for the Impact of Macroeconomic News on Volatility," MPRA Paper 23718, University Library of Munich, Germany.
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Cited by:
  1. Dewachter, Hans & Erdemlioglu, Deniz & Gnabo, Jean-Yves & Lecourt, Christelle, 2014. "The intra-day impact of communication on euro-dollar volatility and jumps," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 131-154.

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