Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data

Abstract

This paper examines the temporal effect of domestic monetary policy surprises on both returns and volatility of returns of the South African rand/U.S. dollar exchange rate. The analysis in this “event study” proceeds using intra‐day minute‐by‐minute exchange rate data, repo rate data from the South African Reserve Bank's scheduled monetary policy announcements, and market consensus repo rate forecasts. A carefully selected sample over the period August 2003 to November 2017 ensures that the change in monetary policy is exogenous to the exchange rate. We find statistically and economically significant responses in intra‐day high‐frequency South African rand/U.S. dollar exchange rate returns and volatility of exchange rate returns to domestic interest rate surprises, but anticipated changes have no bearing on exchange rate returns and their volatility. The empirical results also indicate that there is an instantaneous response of the rand/dollar exchange rate to monetary policy surprises and that monetary policy news is an important determinant of the exchange rate until at least 42 minutes after the pronouncement – suggesting a high degree of market “efficiency” in its mechanical sense (although not necessarily in the deeper economic‐informational sense) in processing this information. Essentially, the asymmetric GARCH results exhibit no leverage effects – positive and negative information shocks have symmetric effects on conditional variance.

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

“…The rise in US repo rate news induces depreciation of USD against PKR which is coherent with the FPMM and findings of Ehrmann and Fratzscher (2005), and Hayo and Neuenkirch (2012). The news of a rise in EU repo rate leads to an appreciation of EURO against PKR which is coherent with sticky-price monetary model (SPMM) and findings of May et al (2018) and Mpofu and Peters (2017). The news of an increase in the UK consumer price index causes an appreciation of GBP against PKR.…”

“…They conclude an unanticipated monetary tightening leads to a rapid appreciation of exchange rates. Hayo and Neuenkirch (2012), May, Farrell, and Rossouw (2018), and Mpofu and Peters (2017) report high exchange rates reaction to monetary policy news. Cheung et al (2019) analyse and compare the relative impact of Japanese and US macroeconomic news before, during, and after the global financial crisis.…”

Does macroeconomic uncertainty really matter in predicting stock market behavior? A comparative study on China and USA

“…In contrast to the studies like Schwert (1989), Morelli (2002) and Gay (2016), the current study finds close relationship between stock market and macroeconomic indicators either one-way or two-way. The insignificant relationship documented in the literature is most likely due to omitted variables (Demir and Ersan, 2018;May et al, 2018). For that reason, the current study has selected a broad set of macroeconomic indicators based on thorough literature review and rigorous diagnostic checks, and these variables capture the real economic uncertainty, financial and global risk factors in relation to stock market of China and USA.…”

Macroeconomic News and Exchange Rates: Exploring the Role of Order Flow

“…Moreover, “GARCH models increase estimation efficiency by modelling volatility clustering and providing explicit estimates of the parameters describing the time-varying nature of the conditional variance” (Engle, 1982). Therefore, several studies employed GARCH models to study the news effects on exchange rates for different countries (Hayo & Neuenkirch, 2012, 2013; May et al, 2018; Omrane & Hafner, 2015).…”

“…One strand of studies find that macroeconomic news announcements directly and immediately incorporate public information into exchange rates (Almeida et al, 1998; Andersen et al, 2003; Ben Omrane et al, 2020; Boudt et al, 2019; Gau & Wu, 2017; May et al, 2018). These studies find that only common knowledge macroeconomic information matters and there are rational and homogeneous market participants, interpreting public information identically and thus, uniformly calculate changes in exchange rates.…”