The impact of macroeconomic surprises on spot and forward foreign exchange markets

This paper evaluates the effects of surprises in 23 types of macroeconomic announcements on foreign exchange rates, and on the forward premium. Several findings emerge. First, as in the balance-of-payment framework, announcements that convey a decline in consumer demand increase foreign exchange rat...

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Bibliographic Details
Published in:Journal of international money and finance 2005-09, Vol.24 (5), p.693-718
Main Authors: Simpson, Marc W., Ramchander, Sanjay, Chaudhry, Mukesh
Format: Article
Language:English
Subjects:
Economic shock
Economic theory
Empirical research
Error correction model
Financial information
Foreign exchange
Foreign exchange markets
Foreign exchange rates
Forward premium
Futures
Hypothesis testing
International capital market
International finance
Macroeconomic announcements
Macroeconomic news
Macroeconomics
Panel data
Purchasing power parity
Stock exchange
Studies
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Summary:This paper evaluates the effects of surprises in 23 types of macroeconomic announcements on foreign exchange rates, and on the forward premium. Several findings emerge. First, as in the balance-of-payment framework, announcements that convey a decline in consumer demand increase foreign exchange rates. Second, the PPP hypothesis is rejected in favor of portfolio balance effects in determining exchange rates. Third, the behavior of forward premiums is consistent with covered interest rate parity. Fourth, exchange rates respond to announcements related to consumer demand, inflation, and interest rates, but not to the announcements directly related to the general strength of the economy. Finally, among the news releases considered, surprises in the Treasury budget, trade balance and capacity utilization have the strongest influence in the currency market.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2005.04.005