Macroeconomic news and exchange rates

This paper examines the relationship between macroeconomic news and the dollar–Mark and dollar–Yen exchange rates. We employ high-frequency observations for a 10-year period. We investigate whether exchange rate observations need to be sampled at a high frequency in order to detect significant effects from news announcements on mean returns and volatility. We examine the linearity and symmetry of the responses to news and also allow the effects of the news announcements to vary across states of the economy. We find that news indicating a stronger U.S. economy causes an appreciation of the U.S. dollar, that the responses are essentially complete within 5 min, and that measuring the responses over 6-h intervals eliminates the statistical significance of the news. The effects of news appear linear and symmetric but there is some evidence that the effects depend on the state of the economy.     

The impact of economic news on bond prices: Evidence from the MTS platform

Although there is an extensive literature on the impact of macroeconomic announcements on asset prices, the bond market has received less attention than the foreign exchange and equity markets, even less if we consider the European market. This paper uses high-frequency intra-day data over a three-year period to investigate the impact of regularly scheduled macroeconomic news and monetary policy announcements on the returns of the Italian government bond market, the largest one in the Euro-zone. With respect to the previous papers, we use a much broader set of announcements, 68, and a relatively novel dataset (MTS). We find that 25 news have a significant impact on bond returns and that almost all announcements are incorporated into prices within 20 min from the release.     

Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets

Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. Using the standard realized volatility estimator, we find that one can sample dollar/euro returns as frequently as once every 15 to 20 s without contaminating estimates of integrated volatility; 10-year Treasury note returns may be sampled as frequently as once every 2 to 3 min on days without U.S. macroeconomic announcements, and as frequently as once every 40 s on announcement days. Using a simple realized kernel estimator, this sampling frequency can be increased to once every 2 to 5 s for dollar/euro returns and to about once every 30 to 40 s for T-note returns. These sampling frequencies, especially in the case of dollar/euro returns, are much higher than those that are generally recommended in the empirical literature on realized volatility in equity markets. The higher sampling frequencies for dollar/euro and T-note returns likely reflect the superior depth and liquidity of these markets.     

Foreign news and the structure of co-movement in European equity markets: An intraday analysis

We investigate European equity market volatility responses to foreign macroeconomic surprises. We measure the length of the response and decompose the news effect into direct and indirect components. The latter is induced by volatility transmission between equity markets. We show that 50 percent of the total accumulated impact of US macroeconomic news on the DAX 30 and CAC 40 volatilities is attained after 90 min. We find that the news announcements have significant direct impacts on both European indices but the indirect effect on the French index is stronger than that on the German.     

Do FOMC minutes matter to markets? An intraday analysis of FOMC minutes releases on individual equity volatility and returns

This paper examines the 2006 to 2007 time period to determine the extent to which the release of the Federal Reserve minutes affects equity volatility and returns for 2832 individual firms. Using intraday data, we find that equity returns are essentially unaffected by FOMC minutes releases. We do find evidence of volatility effects, in that conditional volatility is lower prior to the minutes release and higher after the minutes release on release days, relative to a “control” day one week prior to the release date. These differences manifest at the 2:00–2:05 pm interval, and generally dissipate within 15 min. Consistent with previous literature, we also find evidence of both industry-specific and firm size effects in our data. Finally, we see that volatility is higher (lower) when the minutes are released after the Federal Reserve engages in restrictive (expansionary) monetary policy. Our results are robust to a variety of different definitions of the “control” dates, as well as differing industry definitions.     

Macroeconomic announcements and asymmetric volatility in bond returns

This study analyses the impact of macroeconomic news announcements on the conditional volatility of bond returns. Using daily returns on the 1, 3, 5 and 10 year US Treasury bonds, we find that announcement shocks have a strong impact on the dynamics of bond market volatility. Our results provide empirical evidence that the bond market incorporates the implications of macroeconomic announcement news faster than other information. Moreover, after distinguishing between types of macroeconomic announcements, releases of the employment situation and producer price index are especially influential at the intermediate and long end of the yield curve, while monetary policy seem to affect short-term bond volatility.     

Intraday periodicity, calendar and announcement effects in Euro exchange rate volatility

This paper provides an analysis of intraday volatility using 5-min returns for Euro-Dollar, Euro-Sterling and Euro-Yen exchange rates, and therefore a new market setting. This includes a comparison of the performance of the Fourier flexible form (FFF) intraday volatility filter with an alternative cubic spline approach in the modelling of high frequency exchange rate volatility. Analysis of various potential calendar effects and seasonal chronological changes reveals that although such effects cause deviations from the average intraday volatility pattern, these intraday timing effects are in many cases only marginally statistically significant and are insignificant in economic terms. Results for the cubic spline approach imply that significant macroeconomic announcement effects are larger and far more quickly absorbed into exchange rates than is suggested by the FFF model, and underscores the advantage of the cubic spline in permitting the periodicity in intraday volatility to be more closely identified. Further analysis of macroeconomic announcement effects on volatility by country of origin (including the US, Eurozone, UK, Germany, France and Japan) reveals that the predominant reactions occur in response to US macroeconomic news, but that Eurozone, German and UK announcements also cause significant volatility reactions. Furthermore, Eurozone announcements are found to impact significantly upon volatility in the pre-announcement period.     

January Anomalies: Implications for the Market's Incorporation of News

We examine the responses of five interest rate instruments to the release of macroeconomic announcements to determine whether January returns behave differently from returns in other months when information is released. Our results suggest that in all instruments, returns in January are less sensitive to macroeconomic news, compared with other months. This is true even though the number and type of announcements are much the same in January as in other months. The instruments examined feature important differences in liquidity, maturity, credit risk, and other institutional differences, suggesting that our evidence is robust.     

Under-or-overreaction: Market responses to announcements of earnings surprises

We test whether the well-documented market reaction to the announcements of earnings surprises is a manifestation of an investor underreaction or overreaction to extremely good or bad earnings news. Using the market reaction in the three-day period surrounding the announcements of extreme earnings surprises (i.e., SUE) in quarter Q_t as a reference point, we show that firms reporting a high (low) SUE in subsequent quarter Q_t + 1 that confirms their initial quarter Q_t SUE ranking in the same highest or lowest SUE quintiles generate an incremental price run that moves in the same direction as that of the initial SUE. However, the price impact of the confirming SUE signal is weaker than that of its initial SUE. Our findings are robust to the Fama-French three-factor daily regression extended by the momentum factor and a number of other robustness tests. Our result is not consistent with the prevalent view that investors underreact to earnings news. To the contrary, the evidence suggests an initial investor overreaction to extreme SUE signals.     

The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence

This paper estimates a stochastic volatility model of short-term riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatility exhibits faster mean-reverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates. The less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news.     

The impact of macroeconomic news on quote adjustments, noise, and informational volatility

We study the impact of the arrival of macroeconomic news on the informational and noise-driven components in high-frequency quote processes and their conditional variances. We decompose bid and ask returns into a common (“efficient return”) factor and two market-side-specific components capturing market microstructure effects. The corresponding variance components reflect information-driven and noise-induced volatilities. We find that all volatility components reveal distinct dynamics and are positively influenced by news. The proportion of noise-induced variances is highest before announcements and significantly declines thereafter. Moreover, news-affected responses in all volatility components are influenced by order flow imbalances.     

How Markets Process Information: News Releases and Volatility

We examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets. We find these announcements are responsible for most of the observed time-of-day and day-of-the-week volatility patterns in these markets. While the bulk of the price adjustment to a major announcement occurs within the first minute, volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours. Nonetheless, these subsequent price adjustments are basically independent of the first minute's return. We identify those announcements with the greatest impact on these markets.     

The Impact of Public Information on the Stock Market

We study the relation between the number of news announcements reported daily by Dow Jones & Company and aggregate measures of securities market activity including trading volume and market returns. We find that the number of Dow Jones announcements and market activity are directly related and that the results are robust to the addition of factors previously found to influence financial markets such as day-of-the-week dummy variables, news importance as proxied by large New York Times headlines and major macroeconomic announcements, and noninformation sources of market activity as measured by dividend capture and triple witching trading. However, the observed relation between news and market activity is not particularly strong and the patterns in news announcements do not explain the day-of-the-week seasonalities in market activity. Our analysis of the Dow Jones database confirms the difficulty of linking volume and volatility to observed measures of information.     

Riding the swaption curve

We conduct an empirical analysis of the term structure in the volatility risk premium in the fixed income market by constructing long-short combinations of two at-the-money straddles for the four major swaption markets (USD, JPY, EUR and GBP). Our findings are consistent with a concave, upward-sloping maturity structure for all markets, with the largest negative premium for the shortest term maturity. The fact that both delta–vega and delta–gamma neutral straddle combinations earn positive returns that seem uncorrelated suggests that the term structure is affected by both jump risk and volatility risk. The results seem robust for macroeconomic announcements and the specific model choice to estimate the risk exposures for hedging.     

International linkages and macroeconomic news effects on interest rate volatility — Australia and the US

We examine international linkages between daily time series of US and Australian 3-month treasury bills and 10-year government bonds from 1987–1995, paying particular attention to the effects of macroeconomic announcements in both countries. The two countries' interest rate data are modeled by a bivariate exponential generalized autoregressive conditional heteroscedasticity (EGARCH) formulation. The results suggest that market participants believed the Reserve Bank of Australia targeted the consumer price index (CPI), while the Federal Reserve targeted economic activity. Monetary policy announcements had significant effects on interest rates, as well as on their volatility in the short term. US macroeconomic activity announcements significantly moved Australian interest rates, particularly at the short end. Australian interest rates moved significantly in response to the previous day's US interest rate shocks. The conditional volatility of the Australian interest rate changes was also significantly influenced by lagged US interest rate shocks, as well as by surprises in US macroeconomic announcements. Some macroeconomic news announcements raised conditional volatilities, while others reduced them. Overall, there was a remarkable and complex array of linkages between the two countries.     

The reaction of asset prices to macroeconomic announcements in new EU markets: Evidence from intraday data

We estimate the impact of macroeconomic news on composite stock returns in three emerging European Union financial markets (the Budapest BUX, Prague PX-50, and Warsaw WIG-20), using intraday data and macroeconomic announcements. Our contribution is twofold. We employ a larger set of macroeconomic data releases than used in previous studies and also use intraday data, an excess impact approach, and foreign news to provide more reliable inferences. Composite stock returns are computed based on 5-min intervals (ticks) and macroeconomic news are measured based on the deviations of the actual announcement values from their expectations. Overall, we find that all three new EU stock markets are subject to significant spillovers directly via the composite index returns from the EU, the U.S. and neighboring markets; Budapest exhibits the strongest spillover effect, followed by Warsaw and Prague. The Czech and Hungarian markets are also subject to spillovers indirectly through the transmission of macroeconomic news. The impact of EU-wide announcements is evidenced more in the case of Hungary, while the Czech market is more impacted by U.S. news. The Polish market is marginally affected by EU news. In addition, after decomposing pooled announcements, we show that the impact of multiple announcements is stronger than that of single news. Our results suggest that the impact of foreign macroeconomic announcements goes beyond the impact of the foreign stock markets on Central and Eastern European indices. We also discuss the implications of the findings for financial stability in the three emerging European markets.     

Order imbalance,market returns and macroeconomic news: Evidence from the Australian interest rate futures market

The relationship between order imbalance, market returns and macroeconomic news is examined in the context of the Australian interest rate futures market. Contemporaneous order imbalance exerts a significant impact on market returns in the expected direction i.e. excess buy (sell) orders drive up (down) prices. Order imbalances are related to past market returns with market participants acting in a contrarian manner across all products following market rallies. Nine major macroeconomic announcements are identified with order imbalance, and returns, reacting to such announcements in a manner that correctly reflects the news component. Following a scheduled macroeconomic announcement there is an increase in the level of information asymmetry within the interest rate futures market, demonstrated by an increased sensitivity to order flow. Finally, the pattern of order imbalance immediately prior to scheduled announcements suggests that there is no information leakage.     

Can dual-currency sovereign CDS predict exchange rate returns?

This paper examines both the time-series and cross-sectional variation in the difference between US dollar and Euro denominated sovereign CDS spreads for a group of Eurozone countries. We find that the spread difference between dual-currency sovereign CDS significantly affects the bilateral exchange rate returns. In addition, the difference could predict the cumulative exchange rate returns up to 10 days. The results strongly suggest that the difference contains important information for the exchange rate dynamics at various phases of the crisis.     

Order imbalance,market returns and macroeconomic news: Evidence from the Australian interest rate futures market

The relationship between order imbalance, market returns and macroeconomic news is examined in the context of the Australian interest rate futures market. Contemporaneous order imbalance exerts a significant impact on market returns in the expected direction i.e. excess buy (sell) orders drive up (down) prices. Order imbalances are related to past market returns with market participants acting in a contrarian manner across all products following market rallies. Nine major macroeconomic announcements are identified with order imbalance, and returns, reacting to such announcements in a manner that correctly reflects the news component. Following a scheduled macroeconomic announcement there is an increase in the level of information asymmetry within the interest rate futures market, demonstrated by an increased sensitivity to order flow. Finally, the pattern of order imbalance immediately prior to scheduled announcements suggests that there is no information leakage.     

Exchange rate volatility,macroeconomic announcements and the choice of intraday periodicity filtering method

Filtering out the intraday periodicity of volatility is crucial for using high frequency data in econometric analysis. This paper studies the effects of filtering on statistical inference as regards the impact of news on exchange rate volatility. The properties of different methods are studied using a five-minute frequency EUR/USD data set and simulated returns. The simulation results suggest that all the methods tend to produce downward-biased estimates of news coefficients, some more biased than others. The study supports the Flexible Fourier Form method as the best for seasonality filtering.