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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 34, Issue 7, July 2010, Pages 1628–1636
This paper studies competition in price discovery between spot and futures rates for the EUR–USD and JPY–USD markets around scheduled macroeconomic announcements. Using both the information shares approach and the common factor component weight approach for futures prices from the Chicago Mercantile Exchange (CME), as well as deal prices from spot trading on the Electronic Broking Services (EBS), we gauge how foreign exchange spot and futures markets respond to news surprises. The results show that the spot rates provide more price discovery than do the CME futures rates overall; however, the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases.
The effect of public information announcements on foreign exchange (FX) spot and futures rates reveals the relative efficiency between these two markets. Using recently available spot exchange rate data from Electronic Broking Services (EBS), we study the relative contributions to price discovery of both FX spot and futures rates surrounding the releases of major US macroeconomic announcements. By using EBS data, we can examine the reaction of transaction-level EUR–USD and JPY–USD exchange rates to macroeconomic information. The price discovery process refers to how price movements react to relevant information. Understanding exactly how information gets incorporated into exchange rates is critical for understanding exchange rate dynamics (e.g., Osler et al., 2006). With high-frequency exchange rate data across currencies, we can investigate the potential determinants and characteristics of price discovery in greater detail. Furthermore, we use a broad set of synchronized survey data about market participants’ expectations and thus infer “surprises” or “innovations” from announcements of macroeconomic fundamentals. The announcement of macroeconomic indicators may change the information structure in the market, such that the price discovery process between FX spot and futures markets varies significantly. Studies that explore news announcement effects in currency markets generally focus only on an individual market, whether the FX spot or futures market, and analyze the impact of news announcements on market volatility.1 Few studies compare the relative contribution of FX spot and futures markets to price discovery when news releases occur. However, when they compare the volatility spillover between FX spot and futures markets, both Crain and Lee, 1995 and Chatrath and Song, 1998 find that the volatility spillover from the futures market to the spot market is more prominent on announcement days. This finding relates to the difference in market quality of the FX spot and futures markets. Unlike Crain and Lee, 1995 and Chatrath and Song, 1998, who use the volatility spillover relationship to determine which market reacts to information more rapidly, we employ the information share approach and the common factor component weight approach to explore the evolution of price discovery.2 These two methods consider the stochastic common factor behind spot and futures rates and measure the degree of relative efficiency across related markets. Without a centralized marketplace, the traditional interdealer FX spot market is fragmented and decentralized, with transactions occurring in different locations and at different prices. That is, the level of transparency in the FX spot market is lower, and the exchange rate may respond more slowly to information related to fundamentals, in contrast with the FX futures market on the Chicago Mercantile Exchange (CME). Crain and Lee, 1995, Chatrath and Song, 1998, Martens and Kofman, 1998, Rosenberg and Traub, 2009 and Tse et al., 2006 reveal that the FX futures market contributes more to price discovery than does the spot market. However, the trading volume of the FX spot market is the largest among existing forward, futures, and swap transactions markets.3 Because the FX futures market is much smaller than the FX spot market, it seems reasonable to infer that the spot market takes a more significant share of the price determination (Lyons, 2001). Furthermore, the active trading and higher liquidity in the FX spot market could enhance information assimilation, such that FX spot rates should react to relevant, fundamental news faster than do the FX futures rates. The use of spot rates from the EBS could avoid mismeasurement of spot rates’ pricing efficiency. Results based on both the Hasbrouck information share and the Granger–Gonzalo common factor weight show that the EBS spot market contributes more to price discovery than do the CME futures markets for both the JPY–USD and EUR–USD exchanges, consistent with Cabrera et al. (2009).4 Our finding differs from the conclusions of Crain and Lee, 1995, Chatrath and Song, 1998, Martens and Kofman, 1998, Rosenberg and Traub, 2009 and Tse et al., 2006, all of whom argue that FX futures rates contribute more to price discovery than do the spot rates.5 This conflict may reflect the enhanced price efficiency in EBS trading (Ito and Hashimoto, 2006), which has a larger market share, more liquidity, and greater transparency than other trading venues for spot FX rates. Other things being equal, the profit potential associated with the leverage advantage of the futures market attracts informed traders. When macroeconomic announcements are released, the information structures in FX spot and futures markets likely vary, such that the futures markets may attract more informed traders and contribute more to price discovery. Our empirical results indicate that after news announcements, the contribution of futures rates to price discovery is greater than it would be without any announcement; however, the contribution of the spot rates declines when news announcements are released. Not only do we find an aggregated effect of news announcements in the price discovery of futures and spot rates for the JPY–USD and EUR–USD exchanges, but we also discover that several individual announcements affect the price discovery process between futures and spot markets. Moreover, some news surprises, such as the gross domestic product (GDP), employment report, and durable goods orders, have a positive impact on the price discovery of the FX futures rates. These results support the proposition that the dynamics of the price discovery process depend on the information flow and the content of the information in the markets. The remainder of this paper is organized as follows. In Section 2, we introduce trading on the EBS. Section 3 describes the data we use for this study. After discussing how to measure contributions to price discovery through information share and common factor component weight approaches in Section 4, we summarize the empirical results and the determinants of the futures market’s relative information shares over time in Section 5. Section 6 concludes.
نتیجه گیری انگلیسی
We examine the relative contributions to price discovery of the FX spot and futures rates for the JPY–USD and EUR–USD markets, especially in the times surrounding macroeconomic news announcements. In particular, we use the EBS deal price for the spot exchange rate during a sample period from January 1, 2004, to December 31, 2005, and calculate information shares (Hasbrouck, 1995) and common factor weights (Gonzalo and Granger, 1995) to gauge a market’s contribution to price discovery, The two measures are very similar, and the conclusions they reach are essentially the same. The EBS spot trading of the euro and Japanese yen contributes more to price discovery than does the futures trading on the CME. Overall, no matter how many intradaily intervals we divide a day into, the FX spot market plays a more dominant role in the price discovery process. The futures returns are relatively more sensitive to announcements than are the spot returns. When scheduled macroeconomic announcements actually are released, the FX futures market appears to attract more informed traders, at least in the short term, and contributes more to the price discovery involving the Japanese yen and the euro than does the FX spot market. Among the U.S. announcements we consider, those pertaining to the GDP, employment report, and durable goods orders significantly affect the evolution of price discovery. However, this increase in the information share near news releases does not change the dominance of the spot market in the price discovery process. Using a longer sample period and intra-daily measures of price discovery, whether through the information shares or the common factor weights, enables us to observe the evolution of the price discovery between the EBS spot and CME futures trading systems. The estimation results from our determinant regression model suggest that the currency futures market contributes a larger information share when the futures market is more liquid. In contrast with Chakravarty et al. (2004) and Capelle-Blancard (2001), our findings indicate that the relative contribution of the futures market to price discovery is higher when the spot market is more volatile. We also find that when the spot market’s transaction cost (in terms of spread) is higher, the relative information shares of the spot and futures markets remain unchanged, which suggests that the transaction cost hypothesis does not hold in currency markets.