Analysis of the response of exchange rates to specific FOMC announcements using high-frequency data

Abstract

Empirical studies have shown that Federal Open Market Committee (FOMC) announcements affect the exchange rate. Because of different policy targets, the exchange rate response to specific events may vary. Based on the theory of directional change (DC), this study analyzes the effects of specific FOMC announcements on exchange rates, specifically examining the continuous effects using a variable for DC volatility and high-frequency data. We find that, in contrast to variables for volatility based on time-series data, our variable for DC volatility is sensitive to the effects of specific FOMC announcements on exchange rates. Specifically, the exchange rate has a strong response to announcements of an expansionary monetary policy and a weaker response to a tighter or unchanged policy. This study presents a new explanation for the effects of FOMC announcements on exchange rates. Moreover, our variable for DC volatility has the potential to be used for measuring the impact of other events on financial markets.

Keywords

• F31
• G28