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

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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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  • Tanseli Savaser, 2007. "Exchange Rate Response to Macro News: Through the Lens of Microstructure," Department of Economics Working Papers 2007-02, Department of Economics, Williams College.
  • Handle: RePEc:wil:wileco:2007-02
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    Cited by:

    1. Osler, Carol & Savaser, Tanseli, 2011. "Extreme returns: The case of currencies," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2868-2880, November.
    2. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
    3. Christopher J. Neely & Brett W. Fawley, 2012. "Capital Flows And Japanese Asset Volatility," Pacific Economic Review, Wiley Blackwell, vol. 17(3), pages 391-414, August.
    4. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    5. Deniz Erdemlioglu & Sébastien Laurent & Christopher J. Neely, 2013. "Econometric modeling of exchange rate volatility and jumps," Chapters,in: Handbook of Research Methods and Applications in Empirical Finance, chapter 16, pages 373-427 Edward Elgar Publishing.
    6. Christopher J. Neely, 2011. "A survey of announcement effects on foreign exchange volatility and jumps," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 361-385.
    7. Nikola Gradojevic & Christopher J. Neely, 2008. "The dynamic interaction of order flows and the CAD/USD exchange rate," Working Papers 2008-006, Federal Reserve Bank of St. Louis.
    8. Christopher J. Neely & S. Rubun Dey, 2010. "A survey of announcement effects on foreign exchange returns," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 417-464.

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