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Bank of England Interest Rate Announcements and the Foreign Exchange Market

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  • Michael Melvin

    (BlackRock)

  • Christian Saborowski

    (World Bank and Department of Economics, University of Warwick)

  • Michael Sager

    (Department of Economics, University of Warwick and Wellington Management)

  • Mark P. Tayor

    (Warwick Business School and Centre for Economic Policy Research)

Abstract

Since 1997, the Bank of England Monetary Policy Committee (MPC) has met monthly to set the UK policy interest rate. Using a Markov-switching framework that incorporates endogenous transition probabilities, we examine intraday, five-minute return data for evidence of systematic patterns in exchange rate movements on MPC policy announcement days. We find evidence for non-linear regime switching between a high-volatility, informed trading state and a low volatility, liquidity trading state. MPC surprise announcements are shown to significantly affect the probability that the market enters and remains within the informed trading regime, with some limited evidence of market positioning just prior to the announcement.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 6 (2010)
Issue (Month): 3 (September)
Pages: 211-247

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Handle: RePEc:ijc:ijcjou:y:2010:q:3:a:7

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Cited by:
  1. Ehrmann, Michael & Osbat, Chiara & Stráský, Jan & Uusküla, Lenno, 2013. "The euro exchange rate during the European sovereign debt crisis - dancing to its own tune?," Working Paper Series 1532, European Central Bank.
  2. 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.
  3. Rosa, Carlo, 2013. "Market efficiency broadcasted live: ECB code words and euro exchange rates," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 167-178.
  4. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals : Technical Analysis," The Warwick Economics Research Paper Series (TWERPS) 769, University of Warwick, Department of Economics.
  5. 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.
  6. Carlo Rosa, 2012. "How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices," Staff Reports 560, Federal Reserve Bank of New York.

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