A microstructural analysis of the effects of news on order flows and on price discovery in foreign exchange markets
This thesis brings together a number of studies using high frequency foreign exchange (FX) data. The first part examines the effects of scheduled, publicly released macroeconomic news, while the final chapter considers another, related, aspect of FX microstructure. Chapter 1 provides an introduction to the thesis and reviews the literature in high frequency empirical FX research. In Chapter 2, I use up to ten months of FX transactions and quote data to analyse foreign exchange activity around times of scheduled news releases. The effects of news on exchange rate levels are examined, as well as the effects on spreads, trading volume and volatihty. Chapter 3 extends this analysis, asking how public information enters prices. Under rational expectations and efficient markets hypotheses, the news contained in public information announcements should be impounded directly, with there being no role for trades in this process of information assimilation. However, the results suggest that up to two thirds of the price relevant information enters via trading (order flow in particular). Chapter 4 provides an explanation why order flow is so important around public news releases and also examines the effects of news on market depths. In Chapter 5 I examine how much information is carried in trades by looking at the price impact of order flow when feedback trading is allowed. The model that is often used in the literature is proved to be misspecified when temporally aggregated data are employed and Chapter 5 introduces a method to estimate the otherwise unidentified model. Using impulse response functions, I show that trades actually carry more information than previous estimates suggest.