Bank of England Interest Rate Announcements and the Foreign Exchange Market

60 Pages Posted: 20 Apr 2009

See all articles by Michael Melvin

Michael Melvin

CESifo (Center for Economic Studies and Ifo Institute); University of California, San Diego (UCSD) - Rady School of Management

Christian Saborowski

International Monetary Fund (IMF)

Michael Sager

affiliation not provided to SSRN

Mark P. Taylor

Barclays - Barclays Global Investors (London)

Date Written: April 2009

Abstract

Since 1997, the Bank of England Monetary Policy Committee (MPC) has met monthly to set the UK policy interest rate. We examine evidence of systematic patterns in exchange rate movements on MPC days over the first decade of operation of the MPC. Daily data reveal significant differences in volatility on the last of three meeting days when the interest rate announcement surprises the market. Intraday, five-minute return data are then used to provide a microscopic view. We use a Markov-switching framework that incorporates endogenous transition probabilities, which allows for an interesting alternative characterization of macroeconomic news effects on the foreign exchange market. We find evidence for non-linear regime switching between a high-volatility, informed-trading state and a low-volatility, liquidity-trading state. MPC surprise announcements are shown significantly to affect the probability that the market enters and remains within the informed trading regime, with some limited market positioning just prior to the announcement.

Keywords: foreign exchange market, microstructure, monetary policy announcements, Markov switching, endogenous probabilities

JEL Classification: E42, E44, F31

Suggested Citation

Melvin, Michael and Melvin, Michael and Saborowski, Christian and Sager, Michael and Taylor, Mark P., Bank of England Interest Rate Announcements and the Foreign Exchange Market (April 2009). CESifo Working Paper Series No. 2613, Available at SSRN: https://ssrn.com/abstract=1392156 or http://dx.doi.org/10.2139/ssrn.1392156

Michael Melvin (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Christian Saborowski

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Michael Sager

affiliation not provided to SSRN ( email )

Mark P. Taylor

Barclays - Barclays Global Investors (London) ( email )

Murray House
Royal Mint Court
EC3N 4HH London
United Kingdom

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