Informational linkages among the major currencies in the EBS market

Evidence from the spot rates of the Euro, Yen and Swiss franc

Research output: Contribution to journalArticle

Abstract

Using high-frequency data on the Euro, Yen and Swiss franc, this paper examines whether the permanent (informational) component of one currency's variance explains the variances of the other currencies as well. Previous studies have not considered this interdependency among currencies. A variance decomposition shows that trade-correlated news on the Euro effectively contributes to the variance of the Swiss franc. In addition, for these two currencies, non-trade-correlated news on one currency reciprocally affects the other. The findings suggest that prior studies may have overestimated the impact of trade-correlated news about a currency on its own permanent variance.

Original languageEnglish
Pages (from-to)17-26
Number of pages10
JournalJapan and the World Economy
Volume24
Issue number1
DOIs
Publication statusPublished - 2012 Jan

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Euro
Swiss
currency
market
evidence
news
Linkage
Currency
News

Keywords

  • Foreign exchange rate
  • High-frequency data
  • Information sharing

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance
  • Political Science and International Relations

Cite this

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title = "Informational linkages among the major currencies in the EBS market: Evidence from the spot rates of the Euro, Yen and Swiss franc",
abstract = "Using high-frequency data on the Euro, Yen and Swiss franc, this paper examines whether the permanent (informational) component of one currency's variance explains the variances of the other currencies as well. Previous studies have not considered this interdependency among currencies. A variance decomposition shows that trade-correlated news on the Euro effectively contributes to the variance of the Swiss franc. In addition, for these two currencies, non-trade-correlated news on one currency reciprocally affects the other. The findings suggest that prior studies may have overestimated the impact of trade-correlated news about a currency on its own permanent variance.",
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AB - Using high-frequency data on the Euro, Yen and Swiss franc, this paper examines whether the permanent (informational) component of one currency's variance explains the variances of the other currencies as well. Previous studies have not considered this interdependency among currencies. A variance decomposition shows that trade-correlated news on the Euro effectively contributes to the variance of the Swiss franc. In addition, for these two currencies, non-trade-correlated news on one currency reciprocally affects the other. The findings suggest that prior studies may have overestimated the impact of trade-correlated news about a currency on its own permanent variance.

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