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Macroeconomic news, order flows and exchange rates

  • Richard Payne

Under rational expectations and e±cient markets, the news contained in public information announcements is directly impounded into prices with there being no role for trades in this process of information assimilation. This paper directly tests this assertion using transaction level exchange rate data and a sample of scheduled macroeconomic announcements. The main result of the paper is that even information that is publicly and simultaneously released to all market participants is largely impounded into prices via the key micro-level price determinant order flow. We quantify the role that order flow plays and find that between a half and two thirds of price relevant information is incorporated into prices via the trading process.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp475.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp475.

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Date of creation: Dec 2003
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Handle: RePEc:fmg:fmgdps:dp475
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
  2. Jain, Prem C, 1988. "Response of Hourly Stock Prices and Trading Volume to Economic News," The Journal of Business, University of Chicago Press, vol. 61(2), pages 219-31, April.
  3. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
  4. Bessembinder, Hendrik, 1994. "Bid-ask spreads in the interbank foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 35(3), pages 317-348, June.
  5. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
  6. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
  7. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
  8. Hoffman, Dennis L & Schlagenhauf, Don E, 1985. "The Impact of News and Alternative Theories of Exchange Rate Determination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 328-46, August.
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