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Analysis of the intraday effects of economic releases on the currency market

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  • Rezania, Omid
  • Rachev, Svetlozar T.
  • Sun, Edward
  • Fabozzi, Frank J.

Abstract

Using four years of second-by-second executed trade data, we study the intraday effects of a representative group of scheduled economic releases on three exchange rates: EUR/$, JPY/$ and GBP/$. Using wavelets to analyze volatility behavior, we empirically show that intraday volatility clusters increase as we approach the time of the releases, and decay exponentially after the releases. Moreover, we compare our results with the results of a poll that we conducted of economists and traders. Finally, we propose a wavelet volatility estimator which is not only more efficient than a range estimator that is commonly used in empirical studies, but also captures the market dynamics as accurately as a range estimator. Our approach has practical value in high-frequency algorithmic trading, as well as electronic market making. --

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Bibliographic Info

Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 3.

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Date of creation: 2010
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Handle: RePEc:zbw:kitwps:3

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Keywords: Foreign exchange; volatility estimation; economic release; wavelet; high frequency;

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  1. Ramsey James B., 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-29, November.
  2. Joel Hasbrouck, 1998. "Security Bid/Ask Dynamics with Discreteness and Clustering: Simple Strategies for Modeling and Estimation," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 98-042, New York University, Leonard N. Stern School of Business-.
  3. BAUWENS, Luc & BEN OMRANE, Walid & GIOT, Pierre, 2003. "News announcements, market activity and volatility in the Euro/Dollar foreign exchange market," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2003029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Edison, Hali J, 1997. "The Reaction of Exchange Rates and Interest Rates to News Releases," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 2(2), pages 87-100, April.
  5. Gencay, Ramazan & Selcuk, Faruk & Whitcher, Brandon, 2005. "Multiscale systematic risk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(1), pages 55-70, February.
  6. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 36(04), pages 523-543, December.
  7. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports, Federal Reserve Bank of New York 99, Federal Reserve Bank of New York.
  8. Kathryn M.E. Dominguez & Freyan Panthaki, 2007. "The Influence of Actual and Unrequited Interventions," NBER Working Papers 12953, National Bureau of Economic Research, Inc.
  9. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
  10. Ramsey, J.B., 2002. "Wavelets in Economics and Finance: Past and Future," Working Papers, C.V. Starr Center for Applied Economics, New York University 02-02, C.V. Starr Center for Applied Economics, New York University.
  11. Jessica James & Kristjan Kasikov, 2008. "Impact of economic data surprises on exchange rates in the inter-dealer market," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(1), pages 5-15.
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Cited by:
  1. Sun, Edward W. & Meinl, Thomas, 2012. "A new wavelet-based denoising algorithm for high-frequency financial data mining," European Journal of Operational Research, Elsevier, Elsevier, vol. 217(3), pages 589-599.

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