The dynamic effect of macroeconomic news on the euro/US dollar exchange rate

Abstract

This study investigates the impact of 70 US and EU macroeconomic news announcements on euro/dollar returns and volatility from November 2004 to April 2014. We use regime smooth transition regression to endogenously define recession and expansion. Our sample period includes the US mortgage crisis and EU sovereign debt crisis. Most news is unstable as its effect varies between these economic states. There are asymmetrical effects between recession and expansion states for both US and EU news, with most US news having a larger impact and nearly double the number of significant EU announcements. Volatility increases for over 85% of news coefficients, with more than half still being significantly different between states.

The news effects on exchange rate returns and volatility: Evidence from Pakistan

“…Most of macroeconomic news announcements affect exchange rate volatility via money demand and capital or current account. These findings are consistent with the results of Lee (1994, 1995), Andersen and Bollerslev (1998), Han (2004), Harada and Watanabe (2009), Cai et al (2008), Evans and Speight (2010), Neely (2011), Laakkonen and Lanne (2013), Omrane and Hafner (2015), Ben Omrane et al (2020).…”

“…Early research uses the efficient market hypothesis and uncovered interest rate parity hypothesis for testing news effects of macroeconomic fundamentals on exchange rates (Cornell, 1982;Dornbusch, 1982;Edwards, 1982;Engel & Frankel, 1984;Hakkio & Pearce, 1985;Hardouvelis, 1984Hardouvelis, , 1988. A considerable amount of research focuses on examining foreign exchange rates response to macroeconomic news releases (Almeida et al, 1998;Andersen et al, 2003;Boudt, Neely, Sercu, & Wauters, 2019;Caporale, Spagnolo, & Spagnolo, 2018;Cheung, Fatum, & Yamamoto, 2019;Ehrmann & Fratzscher, 2005;Fatum, Hutchison, & Wu, 2012;Gau & Wu, 2017;Ben Omrane, Welch, & Zhou, 2020;Pearce & Solakoglu, 2007). These studies focus on price formation in foreign exchange markets and explain the price discovery process in these markets.…”

“…An extensive empirical studies explores the effects of macroeconomic news on exchange rate returns and volatility (Andersen et al, 2003;Pearce & Solakoglu, 2007;Caporale et al, 2018;Ben Omrane et al, 2020). Most of the studies take into account the impact of quantitatively regularly-scheduled news about macroeconomic fundamentals.…”

“…Pearce and Solakoglu (2007) and Fatum et al (2012) find that different states of the business cycle affect news announcements on exchange rates. Ben Omrane, Welch, and Zhou (2020) study Euro Area and US macroeconomic news dynamic effects on exchange rates. They find the effect of most of the news varies between states of expansion and recession.…”

“…The negative news has a greater impact on exchange rate volatility than positive news. Ben Omrane et al (2020) investigate the impact of US and Euro Area macroeconomic news announcements on exchange rate volatility and find significant effect of US and Euro Area news on exchange rate volatility.…”