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An analysis of information impacts in international currency markets

Gordon Alan Johnson, University of Massachusetts Amherst


A growing body of evidence has accumulated on the behavior of volatility for pricing data on a variety of different financial assets. Twenty-four-hour currency markets are a particularly useful vehicle for examining the relationship between information and asset volatility--in part because the distinction between public and private information is clearly defined in the foreign exchange market. This study provides a comprehensive examination of the effect of public news on inter- and intra-day exchange-rate return variances. Unlike previous studies, the impacts of both U.S. and foreign macroeconomic news announcements are examined in the spot and futures currency markets--for the yen, pound, and mark. The relationship between news and volatility is first examined using variance ratio tests over trading and non-trading periods. Second, diffusion and jump-diffusion process models are developed which contain parameters conditional on the release of news. These models are estimated using the method of maximum likelihood and are compared to equivalent unconditional models using likelihood ratio tests. Results from this study provide insight into the relationship between public information and currency market volatility. Variance ratio tests indicate that U.S. news releases have a greater impact on currency variance than foreign news releases. In addition, trading/non-trading variance patterns are found to differ between the spot and futures markets--particularly for the yen. Market liquidity differences and the timing of public news announcements are shown to be factors which can explain whether the spot or futures markets reflect the arrival of public information first. The impact of public macroeconomic news releases on volatility is also shown to be concentrated in the period immediately surrounding the announcement. Maximum-likelihood estimation of diffusion and jump-diffusion process models reveals that simple models, conditional on ex ante macroeconomic news announcements, better explain the currency return generating process than equivalent unconditional models. Over the period studied, merchandise trade balance and industrial production announcements had a greater impact on volatility than money supply or inflation announcements. Finally, the correlation between the yen, pound, and mark was highest on days of U.S. macroeconomic news.

Subject Area

Finance|Banking|Business community

Recommended Citation

Johnson, Gordon Alan, "An analysis of information impacts in international currency markets" (1993). Doctoral Dissertations Available from Proquest. AAI9329633.