An analysis of information impacts in international currency markets

1993 1993

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Abstract (summary)

A growing body of evidence has accumulated on the behavior of volatility for pricing data on a variety of different financial assets. Twenty-four-hour currency markets are a particularly useful vehicle for examining the relationship between information and asset volatility--in part because the distinction between public and private information is clearly defined in the foreign exchange market. This study provides a comprehensive examination of the effect of public news on inter- and intra-day exchange-rate return variances. Unlike previous studies, the impacts of both U.S. and foreign macroeconomic news announcements are examined in the spot and futures currency markets--for the yen, pound, and mark. The relationship between news and volatility is first examined using variance ratio tests over trading and non-trading periods. Second, diffusion and jump-diffusion process models are developed which contain parameters conditional on the release of news. These models are estimated using the method of maximum likelihood and are compared to equivalent unconditional models using likelihood ratio tests.

Results from this study provide insight into the relationship between public information and currency market volatility. Variance ratio tests indicate that U.S. news releases have a greater impact on currency variance than foreign news releases. In addition, trading/non-trading variance patterns are found to differ between the spot and futures markets--particularly for the yen. Market liquidity differences and the timing of public news announcements are shown to be factors which can explain whether the spot or futures markets reflect the arrival of public information first. The impact of public macroeconomic news releases on volatility is also shown to be concentrated in the period immediately surrounding the announcement.

Maximum-likelihood estimation of diffusion and jump-diffusion process models reveals that simple models, conditional on ex ante macroeconomic news announcements, better explain the currency return generating process than equivalent unconditional models. Over the period studied, merchandise trade balance and industrial production announcements had a greater impact on volatility than money supply or inflation announcements. Finally, the correlation between the yen, pound, and mark was highest on days of U.S. macroeconomic news.

Indexing (details)

Business community
0508: Finance
0770: Banking
0310: Business community
Identifier / keyword
Social sciences; currency markets
An analysis of information impacts in international currency markets
Johnson, Gordon Alan
Number of pages
Publication year
Degree date
School code
DAI-A 54/06, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
Schneeweis, Thomas
University of Massachusetts Amherst
University location
United States -- Massachusetts
Source type
Dissertations & Theses
Document type
Dissertation/thesis number
ProQuest document ID
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
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