JEL classification: F31 F4 G1We investigate the volatility reaction to macroeconomic news in major currency markets during the recent global financial crisis. We first present an alternative method for determining the changes in economic states by endogenously estimating crisis thresholds. Second, we assess which macroeconomic indicator gave the earliest warning signal for the upcoming contraction. Third, we investigate whether there is a systematic change in the volatility reaction of exchange rates to news during the crisis period. We find that the estimated logistic transition function based on the housing starts data exhibits the earliest warning signal compared to other indicators. Our results suggest that although volatility response to most news indicators is larger in expansion, currency market reaction to new home sales and Fed funds rate news is larger in the crisis period. We attribute this finding to the context-specific relevance of the housing and credit sectors in the evolution of the global financial crisis.

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We argue that the relationship between managerial pay-for-performance incentives and risk taking is pro-cyclical. We study the relationship between incentives provided by stock-based compensation and firm risk for US non-financial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in significantly lower firm risk when the economy is in a downturn. The documented pro-cyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our findings contribute to the literature on the depressive effects of performance incentives on firm risk by documenting the importance of the interaction between performance incentives and risk aversion.

a b s t r a c tFinancial market crashes can occur even in the absence of news. This paper highlights four properties of price-contingent trading that increase the frequency of such events. Price-contingent trading is common across financial market, since it includes algorithmic trading, technical trading, and dynamic option hedging. The four properties we consider are: (1) high kurtosis in the distribution of order sizes; (2) clustering of trades within the day; (3) clustering of trades at certain prices; and (4) feedback between trading and returns. The paper estimates the relative importance of these factors using data from the foreign exchange market. Calibrated simulations indicate that interactions among these factors are at least as important as any single one. Among individual factors, the orders' size distribution and feedback effects have the strongest influence. Overall, price-contingent trading could account for half of realized excess kurtosis. The paper suggests that extreme returns unaccompanied by news are statistically inevitable in the presence of price-contingent trading.

We examine an unusual episode in the behavior of the euro, pound and yen exchange rate markets when the dollar appreciated (depreciated) against the three major currencies, in response to unfavorable (favorable) US growth news during the global financial crisis. Contrary to the previous findings, we show that, for each currency pair, only a small subset (about a third) of the most significant macro news effects reversed sign, primarily announcements regarding consumption, credit, labor and housing markets. Our results reveal that announcement chronology within a month matters, in that specifically the earliest releases within an indicator category exhibit sign asymmetry.