Senior official speeches and severe price discontinuities in the foreign exchange market

• Published in: Studies in economics and finance (Charlotte, N.C.) N.C.), 2023-11, Vol.40 (5), p.773-794
• Main Authors: Ayadi, Mohamed A., Ben Omrane, Walid, Wang, Jiayu, Welch, Robert
• Format: Article
• Language: English
• Subjects: American dollar; Central banks; Communication; Currency; Derivatives; Economic crisis; Federal Reserve monetary policy; Foreign exchange markets; Foreign exchange rates; Hedging; Interest rates; International finance; Macroeconomics; Management decisions; News; Portfolio management; Presidents; Risk management; Securities markets; Speech; Speeches; Uncertainty; Volatility
• ISSN: 1086-7376; 1755-6791; 1086-7376
• DOI: 10.1108/SEF-01-2023-0015

Purpose This study aims to better understand the effects of speeches as a valuable communication tool for central banks. It extends the analysis of the effects of public speeches on jumps to determine whether individual speakers matter partly because of their name, position or institution. Design/methodology/approach This study detects intraday jumps using a robust-to-jump volatility estimator that accounts for deterministic seasonality. As a result, this study removes spurious jumps that occur when volatility is high and consider the relatively small jumps that occur when volatility is low. After identifying jumps, this study examines their reactions to senior official speeches and macroeconomic news surrounding the US and European Union (EU) financial crises. Findings Despite having the most influential individual speakers, this study finds that the impact of the Federal Reserve (Fed) and European Central Bank (ECB) is mitigated because the two institutions have a relatively small impact on currency jumps. This finding shows that the speaker’s name is more important than his or her institution affiliation. While the Federal Reserve Bank President and Chief Executive, as well as ECB board members, significantly reduce jump sizes, particularly during the EU crisis period, both the Fed Chairman and the ECB President increase the magnitude of the jump in both the US crisis and noncrisis periods, contributing to market instability. Practical implications The implications of the results include international portfolio management, currency derivatives pricing and hedging, risk management and market efficiency. Originality/value The findings contribute to a better understanding of the effects of senior official speech attributes on currency jumps in various economic states. The results raise questions about the speaker’s name, institution and position’s effectiveness in calming markets and reducing uncertainty.