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Trading European Central Bank rumours on the EUR-USD exchange rate market

Lookup NU author(s): Baback Roodbar Mohammadi, Dr Hugh Metcalf, Dr Fabrizio Casalin

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).

Abstract

© 2018 Elsevier Inc. This paper investigates whether the release of market-relevant news in the form of rumours on Twitter can explain the excess of market volatility previously attributed to private information, speculation, and noise traders. We define a simple theoretical model to show that the systematic information content of such rumours should result in detectable price effects in macro-markets. We then pinpoint the arrival of 63 rumours of forthcoming ECB actions over a 420-day sample of one-minute spot EUR-USD rates, and show that there is a real-time, intraday increase in market volatility. This largely unexplored information set can potentially account for significant amounts of unexplained volatility in macro-markets and, therefore, identify a possible explanation of one of the most prominent puzzles in price discovery research.

Publication metadata

Author(s): Roodbar B, Metcalf H, Casalin F

Publication type: Article

Publication status: Published

Journal: International Review of Financial Analysis

Year: 2019

Volume: 61

Pages: 53-70

Print publication date: 01/01/2019

Online publication date: 09/11/2018

Acceptance date: 06/11/2018

Date deposited: 10/01/2019

ISSN (print): 1057-5219

ISSN (electronic): 1873-8079

Publisher: Elsevier

URL: https://doi.org/10.1016/j.irfa.2018.11.001

DOI: 10.1016/j.irfa.2018.11.001

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