The Impact of News in the Dollar/Deutschmark Exchange Rate: Evidence from the 1990s
In this paper I analyze three specifications of spot exchange rate models by using an alternative approach in defining the news variable. In particular, I employ quarterly data of the U.S. dollar/German Mark exchange rate for the period 1991-1998 in order to determine whether the effect of news announcements on the exchange rate is still present in the decade of the 1990s. The empirical evidence suggests that news do not seem to provide explanatory power for justifying deviations from either the efficient markets hypothesis or the uncovered interest rate parity. Nevertheless, newspaper announcements and news about inflation do contribute to significantly explain short run departures from purchasing power parity (PPP) with the expected sign, supporting the view that deviations from PPP will arise from new information available in the market.
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