The Impact of Macroeconomic Announcements on Real Time Foreign Exchange Rates in Emerging Markets

Abstract

This paper utilizes a unique high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the returns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies systematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news.

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

“…This no difference in the impact of positive and negative news is also evident in studies such as Riha () on the euro/Czech Republic Koruna and dollar/Czech Republic Koruna responses and Cai et al . 's () study of how the exchange rates in nine emerging markets react to macroeconomic news in the United States and domestic economies from 2000 to 2006; in the latter study, only 9 cases suggest that the symmetry hypothesis is rejected at 5% level of significance, while 72 other cases cannot reject the symmetric null hypothesis. Hence, leverage effects tend to be sample, exchange rate and shock specific.…”

“…VR joint tests are tests of the joint null hypothesis for all periods in the sample, while the individual tests are the VR tests applied to individual sample periods. Chow and Denning (1993) argue that performing tests using several lag values k51; 2; 3 . .…”

“…Evidence of the absence of asymmetric responses of the rand/dollar exchange rate to repo rate surprises is at variance with the findings of Conrad and Lamla () and Maserumule and Alagidede () but is consistent with the results of Riha () and Cai et al . (). The finding that anticipated repo rate changes effect neither the rand/dollar exchange rate returns nor their volatility after the event indicates that the foreign exchange market response to repo rate shocks conforms to the first implication of the EMH; that is, market traders react to only new information in the form of unexpected announcements.…”

Exchange Rates and Macro News in Emerging Markets

“…Existing studies on the relationship between macro news and exchange rates mainly concern developed as opposed to emerging FX markets (evidence on emerging equity and bond markets is instead provided by Wongswan, 2006 andAndritzky et al, 2007, respectively). In particular, Cai et al (2009) consider the effects of US and domestic news announcements on nine emerging markets (Czech Republic, Hungary, Indonesia, Korea, Mexico, Poland, South Africa, Thailand and Turkey). They follow Andersen et al (2003) and model currency returns as a function of news including lagged effects and heteroscedastic errors, where the latter are the sum of the daily volatility forecast (based on a GARCH(1,.1) specification), the absolute value of news surprises including lags, and the Fourier flexible for the calendar effect.…”

Econometric Modeling of Exchange Rate Volatility and Jumps

“…Although the first studies of news volatility effects used U.S. news reports and USD exchange rates, later studies branched out to study the effect of foreign news and broader definitions of news. Most such work has found that U.S. news has stronger effects on foreign exchange volatility than does foreign news (Cai, Joo, and Zhang, 2009;Evans and Speight, 2010;Harada and Watanabe, 2009).…”