The Effects of US Macroeconomic Surprises on the Intraday Movements of Foreign Exchange Rates: Cases of USD-EUR and USD-JPY Exchange Rates

This paper characterizes the intraday dynamics of the high frequency US Dollar (USD)–Euro (EUR) and US Dollar (USD)–Japanese Yen (JPY) foreign exchange rates that have been subject to macroeconomic fundamentals. Even though the FIGARCH model with a normality assumption is found to be a good starting point, it appears to be inappropriate to represent the underlying movements of the high frequency returns due to the occurrences of jumps. Hence, this paper relies on the FIGARCH model with the mixture distribution that allows for the time-varying jumps that are determined by the US macroeconomic surprises. This paper generally finds that the US macroeconomic surprises are closely related to the intraday movements in the volatility process of the high frequency returns process through the jumps. In particular, the US macroeconomic surprises appear to affect the movements in the volatility process of the foreign exchange rates asymmetrically depending on the signs of the surprises and spuriously increasing the long memory persistence in the volatility process due to the jumps.     

Volatility and Spillover Effects of Yen Interventions

We consider the effects of interventions by the Bank of Japan's (BoJ) on the intraday volatility of the US dollar/Japanese yen (USD/JPY) exchange rates and their spillovers to volatility of the euro/JPY exchange rates. We use 15‐minute data during the period 2000–2004 and employ multivariate generalized autoregressive conditional heteroskedasticity (GARCH) modeling and quartile plots of intraday volatility to analyze the intraday effects of the BoJ interventions on exchange rate volatility. The results indicate that the BoJ interventions decrease daily volatility of the USD/JPY exchange rate but increase the volatility of the euro/JPY series. On intervention days, the intraday volatility has different patterns to those on non‐intervention days.     

Intraweek and intraday trade anomalies: evidence from FOREX market

In this article, we search for the evidence of intraweek and intraday anomalies on the spot foreign exchange (FOREX) market. Having in mind the international scope of this market, empirical evidence against market efficiency (i.e. market anomalies) will have important consequences for the substantial number of FOREX investors all around the globe. We explore intraweek, intraday and interaction between days and hour trade anomalies on the FOREX market over the period of 10 years using hourly time-series data of Euro and US Dollar (EUR/USD) exchange rate on Swiss FOREX market from 1 January 2004 to 11 January 2014. We compare by analysis of variance test all pairs of mean returns on a daily, hourly and daily/hourly basis. t-Test is used to test whether intraday returns are significantly different from zero. We employ Tukey’s honestly significant difference test to explore which intraday pairs of hourly mean returns are significantly greater than zero. We find that intraday and interaction between day and hour anomalies are present in trading EUR/USD on the spot FOREX market over the period of 10 years. The best arbitrage opportunity is evidenced on Fridays, when selling USD and buying EUR at 00:00 and selling EUR and buying USD at 03:00 the same day.     

Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors’ behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.     

Are exchange rates interdependent? Evidence using wavelet analysis

We examine the co-movement in daily returns of USD–INR, EUR–INR, GBP–INR, and JPY–INR currency pair futures contracts traded on the National Stock Exchange of India (NSE) using the wavelet cohesion approach. This study contributes to the literature by examining the scantly studied area of co-movement in exchange rates and using the wavelet approach, which allows us to analyse time–frequency-wise co-movement of the time series. The empirical results indicate that the currency futures markets are nearly perfectly integrated in the long run (monthly, quarterly and biannual scales) offering little potential gains from international portfolio diversification. The discrepancies between currency futures markets are small and almost fade away within 3–6 months. Moreover, international currency diversification might offer relatively higher potential gains at intraweek, weekly, and fortnightly time horizons owing to lower correlations among the currencies under consideration. Finally, our multiple-wavelet correlation and cross-correlation analysis shows that GBP acts as a potential leader/follower across scales. The results of our analysis indicate the dynamic pattern of co-movement among the major currency futures contracts, which provides several implications for portfolio managers and international investors participating in the Indian market.     

The nonlinear dynamic relationship of exchange rates: Parametric and nonparametric causality testing

The present study investigates the linear and nonlinear causal linkages among six currencies denoted relative to United States dollar (USD), namely Euro (EUR), Great Britain Pound (GBP), Japanese Yen (JPY), Swiss Frank (CHF), Australian Dollar (AUD) and Canadian Dollar (CAD). The data spans two periods between 3/20/1991 and 3/20/2007. We apply a new nonparametric test for Granger non-causality by Diks and Panchenko [Diks, C., Panchenko, V., 2005. A note on the Hiemstra–Jones test for Granger noncausality. Studies in Nonlinear Dynamics and Econometrics 9 (art. 4); Diks, C., Panchenko, V., 2006. A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics & Control 30, 1647–1669] and the linear Granger test on the return time series. To detect strictly nonlinear causality, we examine the pairwise VAR-filtered residuals as well as in a six-variate formulation. We find remaining significant bi- and uni-directional causal nonlinear relationships in the series. Finally, we investigate causality after controlling for conditional heteroskedasticity using a GARCH–BEKK model. Whilst the nonparametric test statistics are smaller in some cases, significant nonlinear causal linkages persisted even after GARCH filtering during both periods. This indicates that currency returns may exhibit asymmetries and statistically significant higher-order moments.     

MODEL UNCERTAINTY AND EXCHANGE RATE VOLATILITY*

This article proposes an explanation for shifts in the volatility of exchange‐rate returns. Agents are uncertain about the true data generating model and deal with this uncertainty by making inference on the models and their parameters' approach, I call model learning. Model learning may lead agents to focus excessively on a subset of fundamental variables. Consequently, exchange‐rate volatility is determined by the dynamics of these fundamentals and changes as agents alter models. I investigate the empirical relevance of model learning and find that the change in volatility of GBP/USD in 1993 was triggered by a shift between models.     

Realized volatility transmission: The role of jumps and leverage effects

This paper is the first to employ a multivariate extension of the LHAR–CJ model for realized volatility of Corsi and Renó (2012) considering continuous and jump volatility components and leverage effects. The model is applied to financial (S&P 500), commodity (WTI crude oil) and forex (US$/EUR) intraday futures data and allows new insights in the transmission mechanisms among these markets. Besides significant leverage effects, we find that the jump components of all considered assets do not contain incremental information for the one-step ahead realized volatility. The volatility of S&P 500 and US$/EUR exchange rate futures exhibits significant spillovers to the realized volatility of WTI. Moreover, decreasing equity prices appear to increase volatility in other markets, while strengthening of the US$ seems to calm down the crude oil market.     

Official central bank interventions and exchange rate volatility: Evidence from a regime-switching analysis

In this paper, we investigate the effect of central bank interventions on the weekly returns and volatility of the DEM/USD and YEN/USD exchange rate returns. In contrast with previous analyses, we allow for regime-dependent specifications and investigate whether official interventions can explain the observed volatility regime switches. It is found that, depending on the prevailing volatility level, coordinated central bank interventions can lead to either a stabilizing or a destabilizing effect. Our results lead us to challenge the usual view that such interventions always imply increases in volatility.     

汇率收益率及其收益波动率存在长记忆性吗?——基于人民币汇率和欧元汇率的经验分析

长记忆性研究一直是金融实证研究的一个热点,但过去多数研究主要集中于资本市场。汇率收益率的长记忆性将影响外汇市场的有效性,汇率收益波动率的长记忆性则可能对汇率风险及汇率未来变化产生作用。基于此,本文选择人民币兑美元汇率、欧元兑美元汇率作为研究对象,运用经典重标极差分析法、重标方差分析法及小波方差分析法分别考察它们的收益率和收益波动率序列的长记忆性。研究结果表明:人民币汇率收益率存在长记忆性,而欧元汇率收益率不存在长记忆性;两种汇率收益波动率都存在显著的长记忆性特征,但人民币汇率收益波动率的非周期循环天数长于欧元汇率收益波动率。结论说明了欧元汇率发展的成熟以及人民币汇率形成机制的相对低效,并为追踪汇市行为特征及制定外汇政策提供了新的视角。     

Precious metals–exchange rate volatility transmissions and hedging strategies

This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (i.e., gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. Furthermore, these results become more pervasive when the exchange rate and federal funds rate are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions.     

Intraday return and volatility relationships between the Ibex 35 spot and futures markets

This paper analyses the intraday lead-lag relationships between returns and volatilities in the Ibex 35 spot and futures markets. Using hourly data, we jointly analyze the interactions between markets, estimating a bivariate error correction model with GARCH perturbations which captures stochastically the presence of an intraday U-shaped curve for both spot and futures market volatility. Our findings show a bidirectional causal relationship between market volatilities, with a positive feedback. This two-way transmission of volatility is consistent with market prices evolving according to a long-run equilibrium relationship, and shocks affecting both markets in the same direction. Our empirical results also support a unidirectional cross interaction from futures to spot market returns. This pattern suggests that the futures market leads the spot market in order to incorporate the arrival of new information.     

Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data

Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989–December 2012, we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents’ aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman filter estimation results for the two currencies and the two horizons considered. Although the relative importance of the ‘fundamentalists’ (‘chartists’) is found to increase (decrease) with the time-horizon, chartist behaviour appears to dominate fundamentalist behaviour for both horizons. Central bank intervention is then effective in stabilizing the foreign exchange markets if it encourages fundamentalist activity.     

Market timing in precious metals is detrimental to value creation

Few number of days accounts for most of the returns delivered by precious metals (gold, silver, platinum and palladium). A passive buy and hold investment strategy in precious metals outperforms market timers who miss the best 5, 10 and 50 days by 51%, 71% and 98%, respectively. Likewise, long-term performance of precious metals is largely determined by the return of few outliers (black swans). Thus, investors should reconsider trying to predict when to be in and out of the precious metals markets and support investing in precious metals ETFs.     

Gold and silver manipulation: What can be empirically verified?

The issue of gold and silver price manipulation, in particular price suppression, is examined. We use a mixture of normal approach to decompose the returns into abnormal and control samples. Price suppression is a form of market manipulation of the runs type, where longer negative runs with lower returns than expected would be observed. To explore whether this form of manipulation can be empirically detected the length of runs and the total return observed during a run were computed for modelled abnormal and control clusters in gold and silver. In both metals the proportion of negative runs in the abnormal cluster is greater than the proportion of negative runs in the control cluster. In both cases the average return for negative runs is significantly lower in the abnormal cluster than in the control cluster. When average returns over positive runs are compared the abnormal group has significantly higher expected returns than the control group. Given the short maximum run lengths in the abnormal cluster and the fact that positive runs have significantly higher average returns in the abnormal cluster than in the control cluster, it is likely that that the high volatility associated with the abnormal cluster is the driver of the results presented in this study, as opposed to manipulation.     

Volatility persistence and asymmetry under the microscope: the role of information demand for gold and oil

This study explores the relationship between Google search activity and the conditional volatility of oil and gold spot market returns. By aggregating the volume of queries related to the two commodity markets in the spirit of Da et al. ( 2015 ), we construct a weekly Searching Volume Index (SVI) for each market as proxy of households and investors information demand. We employ a rolling EGARCH framework to reveal how the significance of information demand has evolved through time. We find that higher information demand increases conditional volatility in gold and oil spot market returns. Information flows from Google SVI's reduce the proportion of the significant volatility asymmetry produced by negative shocks in both commodity markets. The latter is more profound in the gold market.     

Jumps in foreign exchange rates and stochastic unwinding of carry trades

Tails in the distribution of JPY/USD exchange rate returns are well approximated by an exponentially dampened power-law. Distribution parameter estimates indicate that yen appreciation jumps belong to a Levy process with unbounded variation, suggesting that same mechanism may be responsible for fluctuations in normal times as well as rare crashes. In contrast, yen depreciation jumps have a well defined second moment suggesting a Gaussian regime. In addition, extreme episodes of yen appreciation are larger and more persistent than episodes of yen depreciation. The asymmetry is magnified and power-law tails are more elongated during times of higher interest rate differential between U.S. and Japan and higher level of VIX indicating that carry trade may be the driver. We propose a model of strategic carry trader behavior that in equilibrium generates exponentially dampened power-law distribution of jumps in foreign exchange along with “up by the stairs down by the elevator” dynamics arising from the assymetries between negative and positive jumps.     

Superstitious seasonality in precious metals markets? Evidence from GARCH models with time-varying skewness and kurtosis

In this article, we analyse whether the Friday the 13th effect documented by Kolb and Rodriguez (1987) can be observed in precious metals markets. Specifically, we use dummy-augmented GARCH models to investigate the impact of this specific calendar day on the conditional means of gold, silver, palladium and platinum returns. The specification of the GARCH model follows a flexible class recently proposed by León et al. (2005) that incorporates time-varying skewness and kurtosis by applying a Gram–Charlier series expansion of the normal density function. Our results for the period from July 1996 to August 2013 provide three important insights. First, there is no evidence that human superstition regarding bad luck Fridays affects precious metals markets in a negative way, i.e. returns on Fridays the 13th are not significantly lower than on regular Fridays. Second, besides showing robustness in a variety of settings, we can confirm this main result in a sensitivity check, where we replace the dummy variables by a new measure of investor attention, recently promoted by Da et al. (2011), that is based on Google search volumes. Third, as an important by-product of our study, we can show that there is significant evidence of time-varying skewness and kurtosis in precious metals returns.     

Hedging and diversification across commodity assets

ABSTRACT

We investigate the conditional cross effects and volatility spillover between equity markets and commodity markets (oil and gold), Fama and French HML and SMB factors, volatility index (VIX) and bonds using different multivariate GARCH specifications considering the potential asymmetry and persistence behaviours. We analyse the dynamic conditional correlation between the US equity market and a set of commodity prices and risk factors to forecast the transmission of shock to the equity market firstly, and to determine and compare the optimal hedge ratios from the different models based on the hedging effectiveness of each model. Our findings suggest that all models confirm the significant returns and volatility spillovers. More importantly, we find that GO-GARCH is the best-fit model for modelling the joint dynamics of different financial variables. The results of the current study have implications for investors: (i) the equity market displays inverted dynamics with the volatility index suggesting strong evidence of diversification benefit; (ii) of the hedging assets gold appears the best hedge for the US equity market as it has a higher hedge effectiveness than oil and bonds over time; and (iii) despite these important results, a better hedge may be obtained by using well-selected firm sized and profitability-based portfolios.     

From Returns to Tweets and Back: An Investigation of the Stocks in the Dow Jones Industrial Average

A sizeable percentage of investors are using social media to obtain information about companies (Cogent Research [2008]). As a consequence, social media content about firms may have an impact on stock prices (Hachman [2011]). Various studies utilize social media content to forecast stock market-related factors such as returns, volatility, or trading volume. The objective of this article is to investigate whether a bidirectional intraday relationship between stock returns and volatility and tweets exists. The study analyzed 150,180 minute-by-minute stock price and tweet data for the 30 stocks in the Dow Jones Industrial Average over a random 13-day interval from June 2 to June 18, 2014 using a BEKK-MVGARCH methodology. Findings indicate that 87% of stock returns are influenced by lagged innovations of the tweets data, but there is little evidence to support that the direction is reciprocal, with only 7% of tweets being influenced by lagged innovations of the stock returns. Results further show that the lagged innovations from 40 percent of stock returns affect the current conditional volatility of the tweets, while 73 percent of tweets affect the current conditional volatility of stock returns. Moreover, there is strong evidence to suggest that the volatility originating from the returns to the tweets persists for 33 percent of stocks; the volatility originating from the tweets to the returns persists for 73 percent of stocks. Last, 53 percent of stocks exhibit both immediate and persistent impacts from returns to tweets, while 90 percent of stocks exhibit both immediate and persistent impacts from tweets to returns. These results may help traders achieve superior returns by buying and selling individual stocks or options. Also, asset and mutual fund managers may benefit by developing a social media strategy.