Report Number

2003-005

Abstract

Public news can be expected to change market prices but, unlike “public information,” there are differing expectations about the full impact and hence trading is necessary for the market to process these divergent views. A good illustration of this is a surprise announcement of an increase in German interest rates coupled with remarkably detailed concurrent transactions data from an electronic market. After initial trades hollowed out the market, a large volume of seller-initiated trades removed most of the existing demand, without many of the prior bids being withdrawn. While this is contrary to a rational expectations view of public information, it is consistent with dealers’ practice, as an exercise in self-discipline, to book targeted profits if possible in the face of uncertainty. Evidence also shows that the speculative activity by traders in reaction to the news destabilized the market for the next two hours.

Keywords

exchange rate, public news, public information, electronic interdealer market, order flows

Date of this Version

2003

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