Advanced Search
MyIDEAS: Login to save this paper or follow this series

Bank of England Interest Rate Announcements and the Foreign Exchange Market

Contents:

Author Info

  • Michael Melvin
  • Christian Saborowski
  • Michael Sager
  • Mark P. Taylor

Abstract

Since 1997, the Bank of England Monetary Policy Committee (MPC) has met monthly to set the UK policy interest rate. We examine evidence of systematic patterns in exchange rate movements on MPC days over the first decade of operation of the MPC. Daily data reveal significant differences in volatility on the last of three meeting days when the interest rate announcement surprises the market. Intraday, five-minute return data are then used to provide a microscopic view. We use a Markov-switching framework that incorporates endogenous transition probabilities, which allows for an interesting alternative characterization of macroeconomic news effects on the foreign exchange market. 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 significantly to affect the probability that the market enters and remains within the informed trading regime, with some limited market positioning just prior to the announcement.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-04/cesifo1_wp2613.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2613.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:ces:ceswps:_2613

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: foreign exchange market; microstructure; monetary policy announcements; Markov switching; endogenous probabilities;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," NBER Working Papers 8959, National Bureau of Economic Research, Inc.
  2. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(2-3), pages 509-541, 03.
  3. Alvaro Almeida & Richard Payne & Charles Goodhart, 1997. "The Effects of Macroeconomic News on High Frequency Exchange Rate Behaviour," FMG Discussion Papers, Financial Markets Group dp258, Financial Markets Group.
  4. Refet Gurkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," Macroeconomics, EconWPA 0504013, EconWPA.
  5. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 39-70.
  6. Hakkio, Craig S & Pearce, Douglas K, 1985. "The Reaction of Exchange Rates to Economic News," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 23(4), pages 621-36, October.
  7. Taylor, Mark P, 1989. "Covered Interest Arbitrage and Market Turbulence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(396), pages 376-91, June.
  8. Takatoshi Ito & V. Vance Roley, 1986. "News from the U.S. and Japan: which moves the yen/dollar exchange rate?," Research Working Paper, Federal Reserve Bank of Kansas City 86-02, Federal Reserve Bank of Kansas City.
  9. Charles M. Jones & Owen Lamont & Robin L. Lumsdaine, . "Macroeconomic News and Bond Market Volatility," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 333, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. Jon Danielsson & Richard Payne, 1999. "Real Trading Patterns and Prices in Spot Foreign Exchange Markets," FMG Discussion Papers, Financial Markets Group dp320, Financial Markets Group.
  11. Martin D. D. Evans & Richard K. Lyons, 2007. "Exchange Rate Fundamentals and Order Flow," NBER Working Papers 13151, National Bureau of Economic Research, Inc.
  12. Jon Faust & John H. Rogers & Eric Swanson & Jonathan H. Wright, 2002. "Identifying the effects of monetary policy shocks on exchange rates using high frequency data," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 739, Board of Governors of the Federal Reserve System (U.S.).
  13. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, American Economic Association, vol. 80(4), pages 689-713, September.
  14. Seung Chan Ahn & Michael Melvin, 2007. "Exchange Rates and FOMC Days," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(5), pages 1245-1266, 08.
  15. Ederington, Louis H. & Lee, Jae Ha, 1996. "The Creation and Resolution of Market Uncertainty: The Impact of Information Releases on Implied Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 31(04), pages 513-539, December.
  16. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1161-91, September.
  17. Craig S. Hakkio & Douglas K. Pearce, 1986. "Exchange rates and discount rate changes," Research Working Paper, Federal Reserve Bank of Kansas City 86-06, Federal Reserve Bank of Kansas City.
  18. Rachel Reeves & Michael Sawicki, 2005. "Do financial markets react to Bank of England communication?," Discussion Papers, Monetary Policy Committee Unit, Bank of England 15, Monetary Policy Committee Unit, Bank of England.
  19. Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(1), pages 81-95.
  20. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 576-605, June.
  21. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 4(2-3), pages 115-158, June.
  22. Richard K. Lyons, 1995. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," NBER Working Papers 4984, National Bureau of Economic Research, Inc.
  23. 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, Elsevier, vol. 23(7-8), pages 1043-1051.
  24. 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, Cambridge University Press, vol. 30(01), pages 117-134, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

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, European Central Bank 1532, European Central Bank.
  2. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-352, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. Christopher J. Neely, 2011. "A survey of announcement effects on foreign exchange volatility and jumps," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 361-385.
  4. Carlo Rosa, 2012. "How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices," Staff Reports, Federal Reserve Bank of New York 560, Federal Reserve Bank of New York.
  5. Christopher J. Neely & S. Rubun Dey, 2010. "A survey of announcement effects on foreign exchange returns," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 417-464.
  6. Rosa, Carlo, 2013. "Market efficiency broadcasted live: ECB code words and euro exchange rates," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 167-178.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2613. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.