09/11 on the USD/EUR foreign exchange market

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe study the relationship between foreign exchange trading activity and volatility on the USD/EUR foreign exchange market on the basis of a unique data set around the events of 09/11/2001. We find that volatility and bid-ask spreads are by far larger at that time, but the shock is not persistent. The positive correlation between volume and volatility does not break up, but intensifies strongly indicating the arrival of new information and increased price risk. We conclude that the USD/EUR foreign exchange market maintains its liquid structure and its efficient processing of exogenous shocks.JEL-Classification: F31, G14, G15

Foreign Exchange Market: Institutional Structure, Regulation, and Policy Implications

“…However, if dealers can't provide the liquidity as required, it will cause trouble such as ruined reputations; in this case, dealers have to be reliable. For example, the FX market continued uninterruptedly and functioned successfully even in the events of September 11, 2001 [34]. However, the traditional customer market is fairly decentralized and opaque.…”

Testing equity market efficiency around terrorist attacks

“…This also proved true in a similar analysis of US equities by Choudhry (2005) who used daily data and identified a rise in the systematic risk of transportation, recreation and aerospace firms following 9-11. Mende (2006) used minute-by-minute data from the USD/EUR foreign exchange market around the time of the 9-11 attacks to examine market efficiency. This showed that spreads and volatility increased sharply after the attacks, but returned to normal within a few hours.…”

Open interest, cross listing, and information shocks

“…Results show that for the Dow Jones Euro STOXX 50 (FESX) and the DAX future (FDAX), there is a clear decrease in the average holding period in the 9 days after the 09/11 terrorist attacks. Mende (2006) studies the effect of 09/11 on the relationship between trading volume and volatility in the USD/EUR foreign exchange market. This relationship depends on the market size, its degree of liquidity, and the flow of information reaching the market (Karpoff, 1987).…”

“…In contrast, Chen and Siems (2004) and Mende (2006) show that there is an increased market resilience and an efficient processing of terrorist attacks in financial markets of developed countries. This raises the question of whether the identified structural shift was triggered by the events of 09/11 or was coincidental with the stabilization of the relationship between LIFFE and Eurex.…”