Asymmetric Information Arrival and the Short-Run Dynamics of Australian Dollar Volatility: a Mixture of Distributions Approach
Contemporary commentators point to excess volatility within the FX market as an indicator of market inefficiency. It is thought that the excessive volatility is being driven by speculation. Policy options have emerged which focus on bounding volatility via government regulation of speculation. These options make implicit assumptions; one, that volatility is excessive and two, that it is speculation which is driving volatility. What is not sufficiently understood is the role public information arrival plays in terms of explaining returns and its volatility impact. It is the purpose of this paper to simply model Australian Dollar returns and volatility with public information arrival, which has been classified into categories so as to ascertain whether total information arrival or the arrival of specific types of information is related to changes in returns and volatility. We use an EGARCH model so as to pick up the asymmetric impacts of good and bad news. We find evidence from both a GARCH and EGARCH model that public information plays an important role in the determination of AUD returns and volatility and that good news impacts are less then negative ones. We also find that economic information in relation to full information set has a greater relationship to volatility. This has some interesting implications in terms of the volatility debate. Rather then regulating speculation, it may be more relevant to clarify information.
|Date of creation:||20 Jan 2000|
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