This paper uses a new transactions data set on the inter bank foreign exchange market to examine the origins of spot exchange rate movements. The data provide a comprehensive picture of trading activity and allow me to examine the contribution of public news to spot rate dynamics over hours, days, and weeks. Contrary the presumption of macroeconomic exchange rates models, I find that public news only accounts for a fraction of exchange rate volatility over the whole frequency spectrum. In particular, I estimate that less that 50\% of the variance of spot rate changes at very high frequencies is attributable to public news. At daily and weekly frequencies, changes in the spot rate understate the effects of public news by 20 to 40 percent because the cumulative effects of independent public and private news exert offsetting effects. These findings suggest one reason for the poor performance of macroeconomic exchange rate models; namely their exclusive focus on public Classification-JEL Codes:
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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number
gueconwpa~05-05-06.
Length: Date of creation: Date of revision: Handle: RePEc:geo:guwopa:gueconwpa~05-05-06
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