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Exchange Rate Response to Macro News: Through the Lens of Microstructure

This study investigates the micro effects of macro news using customer price-contingent orders (i.e. stop-loss and take-profit orders) data from a large foreign exchange dealing bank in the pound/dollar market. Results reveal that price-contingent order placement intensifies 3 to 5 hours prior to the news events. I examine the link between this surge in order placement and the exchange-rate jump following the announcement. I find that price-contingent orders can enhance our ability to explain post-release exchange-rate returns by half. Furthermore, the estimated effect of orders is orthogonal to the news surprises. This implies that there may be a component of the news response that purely reflects institutional features such as order types and not necessarily the public information itself.

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File URL: http://web.williams.edu/Economics/wp/savaserMacronews.pdf
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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2007-02.

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Length: 46 pages
Date of creation: Dec 2007
Date of revision:
Publication status: Published in Journal of International Financial Markets, Institutions & Money, Volume 21, Issue 1, 2011
Handle: RePEc:wil:wileco:2007-02
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Phone: 413 597 2476
Fax: 413 597 4045
Web page: http://econ.williams.edu
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