The impact of European Central Bank Governing Council announcements on the foreign exchange market: a microstructural analysis |
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Authors: | Michael J. Sager Mark P. Taylor |
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Affiliation: | a Department of Economics, University of Warwick, Coventry CV4 7AL, UK; and Putnam Investment Management, 1 Post Office Square, Boston, MA 02109, USA;b Department of Economics, University of Warwick, Coventry CV4 7AL, UK; and Centre for Economic Policy Research, London, UK |
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Abstract: | We examine the evidence regarding systematic patterns in the euro-dollar foreign exchange market on days when the Governing Council (GC) of the European Central Bank announces its interest rate decisions versus other days. We examine 5-minute data in a non-linear framework allowing for switching between a high-volatility, informed-trading state and a low-volatility, liquidity-trading state. We find strong evidence that the GC policy announcements contain significant news content. Although there is some evidence of positioning in the hour prior to the announcement, this probably reflects dealers minimizing their exposure rather than evidence of information leakage. |
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Keywords: | Endogenous Markov switching Euro Interest rates |
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