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Foreign exchange market reactions to news: A microstructure analysis of returns, volatility, and order flow from the Reuters D2000-2 electronic trading system.

Panthaki, Freyan (2007) Foreign exchange market reactions to news: A microstructure analysis of returns, volatility, and order flow from the Reuters D2000-2 electronic trading system. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

The research in this thesis examines the effect of different kinds of news on high frequency order flow, exchange rate returns and volatility. The first chapter studies the impact of different aspects of central bank interventions (direction, size, frequency, timing), and news about these interventions, on exchange rate volatility. Briefly, we find that interventions decrease volatility contemporaneously but the effect is reversed in two hours. This effect is symmetric with respect to the direction of the intervention. The size and frequency of interventions are usually positively correlated with volatility. 9am and 2pm interventions have different effects on volatility, confirming that when the central bank chooses to intervene is important. The second chapter examines the intra-daily influence of a broad set of news reports, including variables which are not typically considered "fundamentals" in the context of standard models of exchange rate determination, and asks whether they too help predict exchange rate behavior. We also examine whether "news" not only impacts exchange rates directly, but also influences exchange rates via order flow (signed trade volume). We find that along with the standard fundamentals, both non-fundamental news and order flow matter. The last chapter examines intra-day foreign exchange market reactions to various types of intervention news (reported actual interventions, falsely reported interventions, oral interventions and unrequited interventions). Research has found that these operations can, under certain circumstances, effectively influence the level and volatility of exchange rates. Using Reuters' time-stamped newswire reports we are able to match the timing of intervention news to movements in intra-day exchange rates. Overall, the results indicate that along with actual interventions, other kinds of intervention news (including denials of intervention and unrequited interventions) and order flow matter. The results from these studies suggest that future models of exchange rate determination ought to include a broader concept of price relevant "news".

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, Finance, Business Administration, Banking
Sets: Collections > ProQuest Etheses
URI: http://etheses.lse.ac.uk/id/eprint/2939

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