Impact of news announcements on the foreign exchange implied volatility

Int. Fin. Markets, Inst. and Money 22 (2012) 719– 737

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Journal of International FinancialMarkets, Institutions & Money

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Impact of news announcements on the foreign exchangeimplied volatility

Andrew Marshall ∗, Taleh Musayev, Helena Pinto, Leilei TangDepartment of Accounting and Finance, University of Strathclyde, 100 Cathedral Street, Glasgow G4 0LN, Scotland, UK

a r t i c l e i n f o

Article history:Received 22 September 2011Accepted 12 April 2012

Available online 27 April 2012

JEL classification:F31

Keywords:Implied volatilityNews announcementsForeign exchange

a b s t r a c t

This paper investigates the impact of news announcements onforeign exchange (FX) implied volatility (IV) for four major FXrates for the 12-year period 1998–2009. The news announcementsexamined are 16 scheduled US macroeconomic announcements,the release of the minutes of the Federal Open Market Committee(FOMC), official US interest rate changes and Bank of Japan (BOJ)interventions. Our results show some of these announcementsimpact on FX IV, which is important to market participants for trad-ing and risk management purposes. We find for the US scheduledmacroeconomic news announcements FX IV tends to drop on theannouncement day, but there are no significant changes in FX IV lev-els pre- and post-announcements, larger announcement surprisescan in some cases influence FX IV differently than smaller surprises,and the impact of positive news is generally not different from theimpact of negative news. For the other three announcements, theonly impact on FX IV is for BOJ interventions indicating that theseinterventions result in upward revisions in expected future marketuncertainty.

© 2012 Elsevier B.V. All rights reserved.

1. Introduction

Important macroeconomic announcements are likely to impact on foreign exchange (FX) volatilityas they provide information on the overall state of the economy. This can result in changes in FX rates asmarket participants change their positions. We are interested in FX volatility patterns, since traders can

∗ Corresponding author. Tel.: +44 0141 548 3894; fax: +44 0141 552 3547.E-mail address: [email protected] (A. Marshall).

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720 A. Marshall et al. / Int. Fin. Markets, Inst. and Money 22 (2012) 719– 737

incorporate these into their models trading and risk management purposes.1 In addition, the existingliterature on the announcement effect of economic variables is mainly on the equity, bond and optionmarkets (see Goeij de and Marquering, 2006; Äijö, 2008).2 However, increasingly attention has beenfocused on the FX markets considering both economic announcements (see, Laakkonen, 2007) andother types of news events such as central bank interventions (see, Nikkinen and Vähämaa, 2009). Thispaper adds to this recent work by studying the impact of 16 important scheduled US macroeconomicannouncements on the FX implied volatility (IV) for four major FX rates for the period 1998–2009. Forthis sample we also consider the impact of three other significant economic news events, the release ofthe minutes of the Federal Open Market Committee (FOMC), the announcement of official US interestrate changes and Bank of Japan (BOJ) FX interventions.3

This paper contributes to the literature in a number of ways. Firstly, contrary to the majority of theprevious studies, we measure FX volatility by IV, an ex ante measure of volatility rather than an ex postmeasure.4 If markets are efficient, IV provides an unbiased estimate of future volatility, since ex postvolatility measures report what actually happened rather than the market expectation of the event(see Bailey, 1988; Rogalski and Maloney, 1989). By using IV we are able to investigate if selected newsannouncements influence the market’s view of future uncertainty (see also, Nikkinen et al., 2006;Nikkinen and Vähämaa, 2009).

Secondly, we examine the behavior of IV not only on the announcement day but also on the dayssurrounding the release day (5 days before and after the news release). Jones et al. (1998) and Bauwenset al. (2005) suggest that speculation, risk aversion or private information can influence trading lev-els in anticipation of the release of important news.5 Moreover, clustering of information arrival andgradual learning might result in the persistence of volatility shocks after the release of importantinformation. If significant, these effects will affect volatility before and after the news announcementday. However, there is debate on the whether there will be an increase or decrease in volatility sur-rounding the news announcement.6 To our knowledge, the literature has not examined if anticipationand/or persistence affect FX IV. Since news announcements should only result in revisions of marketexpectations of uncertainty if new information is released, i.e. if the announcement surprises the mar-ket, we develop our analysis to the surprise effect (the discrepancy between the actual contents of thenews and the expected contents before the release).

Nikkinen et al. (2006) point out the importance of considering the linkages across major FX ratesby applying vector autoregressive (VAR) models and Granger causality tests. A major advantage ofVAR approach is that it does not need to distinguish whether variables are endogenous or exogenous.However, VAR estimates can tend to be imprecise if many parameters are involved. Therefore, ourthird contribution to this literature is the use of Seemingly Unrelated Regression (SUR) model thatcan take the linkage across FX IV into account, but also allow us to investigate the impact of manyexogenous variables on FX IV.

Overall, our results provide support that the announcement of important scheduled informationleads to the resolution of market uncertainty on the announcement day. The announcement of macroe-conomic indicators solves some of the market uncertainty, leading to a drop in IV (Ederington and Lee,

1 It has been suggested by market participants that extremely high levels of volatility are associated with the market lows, andtherefore signaling attractive entry levels for long trades. However, Ederington and Lee (1996) and Kim and Kim (2004) showthat it would be difficult to obtain abnormal trading profits (after adjusting for the transaction costs) based on the observedpatterns in the equity, interest rate and FX futures markets. Although their findings show that abnormal returns could begenerated when the underlying price volatility is relatively low.

2 There is a sizeable literature on the effect of US public information on the US dollar.3 Most prior papers focus on one FX rate (i.e. Ederington and Lee, 1993; Andersen and Bollerslev, 1998) and a smaller number

of announcements (i.e. Kim and Kim, 2004; Bauwens et al., 2005 covered six and nine macroeconomic indicators respectively).In addition, since our period of analysis includes the recent credit crunch, we can also consider whether the impact of the creditcrunch had an impact on our results.

4 Exceptions are Madura and Tucker (1992), Bonser-Neal and Tanner (1996) and Ederington and Lee (1996).5 Using FX quotes on EUR/USD, Bauwens et al. (2005) found evidence that the announcement of important scheduled news

could lead to market volatility adjustments prior to the announcement date.6 For example, the increase in trading activity prior to the announcement date can result in an increase in volatility, but Jones

et al. (1998) suggest that the anticipation of macroeconomic news announcements should have a “calming” effect in the market.

A. Marshall et al. / Int. Fin. Markets, Inst. and Money 22 (2012) 719– 737 721

1996). We do not find significant changes in FX IV levels pre- and post-announcements. The resultsshow some evidence that larger market surprises on scheduled announcements can influence theexpectation of future FX market uncertainty (IV) differently than smaller market surprises, but thereis no clear pattern. The impact of positive news on the expected future market uncertainty is generallynot different from the impact of negative news. We do not find any affect on FX IV levels on the releaseof the minutes of the FMOC and US interest rate changes, but the announcement of BOJ FX interven-tion tends to increase IV, consistent with the findings of Nikkinen and Vähämaa (2009). This seemsto indicate that the announcement of central banks interventions result in upward revisions in theexpected future market uncertainty. We find that the level of IV of the previous day has a significant(negative) effect on the daily change of IV. Thus, smaller volatility levels are more likely to result inlarger changes in IV. Despite the significant increase in market uncertainty at the time of the creditcrunch, we do not find that our results are significantly different in the credit crunch period.

The remainder of this paper is organized as follows. The next section describes the data and theregression estimation models proposed to detect the announcement effect of news on FX IV. Theresults are then presented and the final section concludes.

2. Data and research method

2.1. Data – FX IV series

In this paper we use the daily IV of 1 month, at the money options on four major FX rates USD/EUR,7

USD/GBP, USD/CHF and USD/JPY. The IV data is provided by Olsen and Associates.8 Olsen and Associatescollect daily IV data from market makers of over-the-counter FX options. This should improve thereliability of the results since we do not have to infer IV using an option pricing model.9 Volatilitiesimplied from options prices, are ex ante measures of volatility and thus indicative of future pricevolatility (Scott and Tucker, 1989). The daily quote of IV corresponds to the last quote of IV at NewYork closing time (17:00 EST) and we use the middle quote, the average value of the bid and askquotes from January 1998 to December 2009 (in this paper we define the day using EST time). Due toits nature OTC markets do not close at the end of the day or during weekends.

Following Bonser-Neal and Tanner (1996), we take the natural log of the change in IV by using Eq.(1) to investigate the impact of announcements:

�IVit = ln(

IVit

IVit−1

)(1)

where IVi−t the IV of the FX rate i on day t.Panel A of Table 1 reports the descriptive statistics and diagnostic tests for the daily changes of IV.

The mean IV changes are positive for EUR, GBP and JPY and negative for CHF. The standard deviationof IV change range from 0.033 for EUR to 0.044 for CHF. Skewness and kurtosis of IV changes areall positive, significantly different from zero, and well outside a normality range. This diagnostic testsuggests that the data distribution is asymmetric, skewed right and have a distinct peak near the meanand heavy tails. Andersen et al. (2003) obtained similar results for the FX realized volatility. We testfor stationarity of the IV series for each FX rates. We apply the augmented Dickey-Fuller (ADF) to testwhether there is a unit root in each series. The ADF test is based on the null hypothesis that a unit rootexists in each IV series. The test results, reported in Panel B of Table 1, show that the null hypothesisis rejected at conventional significance levels for all four FX IV series.10

7 We use USD/DM as a proxy for USD/EUR during 1998.8 DeGennaro and Shrieves (1997) and Cai et al. (2001) also use data from Olsen and Associates.9 Ederington and Lee (1996) discuss how the calculation of IV using an option pricing model will not reflect important factors

(like liquidity) that can influence option prices.10 We follow previous research and take the first difference of IV. However, this approach does have the weakness of excluding

information regarding the long-run determination of IV.


Table 1Descriptive statistics of implied volatility (IV) series. This table presents descriptive statistics for the four FX sample used in ouranalysis. Panel A reports statistics for the change in IV. Panel B reports unit root tests.

USD/EUR USD/GBP USD/CHF USD/JPY

Panel A – Descriptive statisticsMean 0.00017 0.00004 −0.00001 0.00013Std. Dev. 0.0332 0.0373 0.0444 0.046Skewness 0.85 0.85 0.44 1.31Excess Kurto. 5.46 49.1 6.94 11.35Minimum −0.20 −0.60 −0.30 −0.27Maximum 0.24 0.60 0.30 0.48Normality test 870** 1853** 1880** 1763**

Panel B – ADF unit root testD-lag 2 −3.23** −3.29** −5.15** −5.25**

D-lag 1 −3.68** −3.52** −5.54** −5.38**

Note: ADF test includes a constant and augmentation lag depths selected by minimizing Akaike’s final prediction error.** Significance at the 5% level.

Table 2Macroeconomic indicators. This table provides the basic description for the main 16 US macroeconomic indicators.

Announcement Explanation (number of announcements between 1998 and 2009)

Trade balance Measures by how much national exports exceed national imports (144)Employment Unemployment rate (144)Consumer price index The change in the cost of a bundle of consumer goods and services, i.e. the change in

the cost of living of most American families (144)Producer price index The average level of prices of a fixed basket of goods received in primary markets by

producers (144)Retail sales Measures the total receipts of retail stores (144)Durable goods orders Measures how much people are spending on long-term purchases (products that are

expected to last more than 3 years) (144)Construction spending The total amount of spending in the U.S. on all types of construction (144)Gross domestic product Advanced, preliminary and final figures for gross domestic product (142)Current account The amount by which a government’s spending exceeds its income (43)Auto sales The number of cars sold during a particular 10-day period (140)Beige book A summary of commentary on current economic conditions by the Federal Reserve

District (88)Industrial production The total physical output of US factory and mines (144)Leading indicators A forecast indicator of the future economy strength (144)Non-farm payroll The number of paid employees working part-time or full-time in US businesses and

government establishments (144)Housing starts The number of residential units which construction has started each month (142)Consumer confidence Measures how confident consumers feel about the state of the economy and their

spending power (143)

2.2. News announcements

Table 2 provides a list of the 16 US macroeconomic scheduled announcements used in this paperand the number of the announcements. Table 3 shows their release dates. Four of the macroeconomicannouncements provide information on consumer demand (Trade Balance, Retail Sales, Auto Salesand Consumer Confidence) and another four are inflationary indicators (Consumer Price Index – CPI;Producers’ Price Index – PPI; Unemployment Rate and Non-Farm Payroll). The remaining six macroe-conomic indicators provide information about economic growth – Construction Spending Report,Housing Starts, Durable Goods, Gross Domestic Product, Index of Industrial Production and LeadingIndicators.

In addition to the scheduled US macroeconomic announcements, we consider the impact of FOMCminutes on FX IV (FOMC meets once in 8 weeks and decides on the official US interest rate). In theperiod of 1998–2009, there were 78 FOMC meetings. We also consider situations when the official


Table 3US Macroeconomic announcement release dates.

For example, March (month X) consumer credit data are announced between May (month X + 2) 5 and May 10. GDP data isdifferent as they are released only quarterly and the GDP data released in a given month are either advance, preliminary or finaldepending on whether the month is the first, second or third of the quarter. For example, first quarter Q1 GDP advance data areannounced between April (month X + 1) 27 and May 4, first quarter GDP preliminary data are announced between May (monthX + 2) 27 and June 4, and first quarter GDP final data are announced between June (month X + 3) 27 and July 4. The table was usedby Andersen et al. (2003) and is based on 2001 Schedule of Release Dates for Principal Federal Economic Indicators, producedby the U.S. Office of Management and Budget and available at http://clinton4.nara.gov/textonly/OMB/pubpress/pei2001.html.

interest rates do change, as the result of FOMC meetings.11 There were 48 occasions in the 1998–2009period when FOMC announced a new official interest rate.

Ederington and Lee (1996) suggest that schedule and unscheduled announcements can have adifferent impact on the uncertainty of financial markets. Dominguez and Panthaki (2005) argue thatunscheduled news result in more ambiguous information that can lead to stronger differences of opin-ion about the implications of the information, and therefore result in larger changes in the volatility.However, DeGennaro and Shrieves (1997) find unscheduled interest rate reports cause volatility todecrease (the calming effect of such announcements or the tendency of the announcements to bereleased during relatively calm periods in the FX market). To examine unscheduled announcementswe were interested in examining the impact of central bank FX interventions on FX IV. The main objec-tive of a central bank intervention is to minimize the deviations of the FX rates from the pre-establishedtargets and to dampen short-term volatility.12 Given that, the US Fed revised the intervention policy,resulting in very few interventions, the dates of the BOJ interventions rather than US central bankinterventions are used in this study (they were the most active in FX interventions of the G7 banks,although from March 2004 the BOJ did not record any FX interventions). The data on the interventions

11 We extend the study of Nikkinen and Sahlström (2004) by focusing on the occasions when FOMC has amended a US officialinterest rate.

12 A positive link between volatility and central bank interventions has been detected, regardless of the research methodused to measure the volatility relation i.e. GARCH models (Baillie and Osterberg, 1997), IV (e.g. Bonser-Neal and Tanner, 1996;Dominguez, 1998), and realized volatility (Dominguez, 2006). However, Ramchander and Sant (2002) argue that central bankintervention could reduce FX rate volatility by giving a clear signal about future monetary policy and stopping speculativeattacks against a currency.

http://clinton4.nara.gov/textonly/OMB/pubpress/pei2001.html


Fig. 1. Bank of Japan (BOJ) interventions data. The figure reports central bank interventions, conducted by the BOJ on 164 daysin 1998–2009 period. Note that during that time period in some of the days the BOJ conducted interventions in more thanone FX currency resulting in 179 interventions. Only the first three of these interventions involve the purchase of Yen, and theremaining 176 interventions involve the sale of Yen against US dollar and Euro. 17 interventions involved Euro. The remaining159 interventions, involved buying the US dollar.

conducted by the BOJ is obtained from the official web site of the Ministry of Finance of Japan. The BOJconducted interventions on 164 days in the 1998–2004 period (Fig. 1). Only the first three of theseinterventions involve the purchase of Yen, the remaining interventions involve the sale of Yen againstUS dollar and Euro. The BOJ’s attempts to prevent appreciation of the Yen are explained by the negativeimpact of a strong Yen on Japanese exports. Seventeen BOJ interventions involved the Euro and in allothers, the Yen was exchanged for US dollar.13

2.3. Research method

We apply the SUR model, proposed by Zellner (1962), to jointly estimate the impact of newsannouncements on FX IV on the announcement day (DAY), 5 days prior to the announcement (LAG)and 5 days following the announcement (FWD). The SUR model extends ordinary least square (OLS)analysis to estimate a system of linear equations with correlated error terms. The OLS analysis ignoresany correlation among the errors across equations. In Eq. (2) we consider a system of equations forthe four FX IV of the form:

�IV = A� + E (2)

where �IV =

⎡⎢⎣

�IV1�IV2�IV3�IV4

⎤⎥⎦, A =

⎡⎢⎣

A1 0 0 00 A2 0 00 0 A3 00 0 0 A4

⎤⎥⎦, Ai = [ 1 ai Lagi Fwd

i], E =

⎡⎢⎣

ε1ε2ε3ε4

⎤⎥⎦, � =

⎡⎢⎣

ˇ1ˇ2ˇ3ˇ4

⎤⎥⎦

The SUR system assumes the vector of error terms, E, are contemporaneous correlated across thefour equations but serially independent. Thus, cov(E) = ̇ ⊗ IT . Where Ai is the ith diagonal componentof matrix A. A2 is the dummy variable that takes the value of one if the news announcement takesplace at day t, and zero otherwise. A3 is the dummy variable that takes value of one on each of 5 dayspreceding the news announcement and zero otherwise. A4 is the dummy variable that takes valueof one on each of 5 days following the news announcement and zero otherwise. � is the vector ofcomfortable dimensions of all the parameters to be estimated. The ith component of � , ˇi, measuresthe economic impact of relevant dummy variables on the change of IV for FX rate i.

Ederington and Lee (1996) report that IV levels change according to the day of the week. If nottaken into account, the presence of seasonality on volatility patterns might lead to confounding results.For example, a number of the announcements are on Friday (e.g. 139 of the 144 announcements of

13 Nikkinen and Vähämaa (2009) examine the effects of the FX market interventions by the BOJ on the ex ante correlationsbetween the JPY/USD, EUR/USD, and GBP/USD FX rates.


unemployment rate (and non-farm payroll) are on Fridays). Thus, a significant positive result for theseeconomic indicators might be indicative of an increase on IV on Friday (i.e. indicative of seasonality),and not indicative of a news announcement effect. In order to control for seasonality we include a day ofthe week (DOW) dummy in our regressions (day-specific dummy variables for Monday to Saturday, forexample, the Monday dummy takes value 1 if it is Monday and 0 otherwise). Also Following Nikkinenet al. (2007), we also investigate the turn-of-the-month (TOM) effect by including dummy variablesfor 5 days before and the month end in our regressions.

2.4. Impact of the unexpected news announcements on FX IV

We investigate the impact of the unexpected news on the FX IV in this section (we exclude theBeige Book announcement as this is a general commentary). Regression (3) considers the impact ofthe “surprise” (unexpected) component of the news announcement on the FX IV. Regressions (4) and(5) are to identify whether this impact is caused by large or small and/or positive or negative news.

�IV = S� + E (3)

where S is the surprise component of the news announcement, and is equal to ln(A/E) or A − F (ln(A/E) isestimated for most indicators, and A − F is estimated only when the use of ln(A/E) would be misleading),where A is the realized value and E is the expected value. Regression (5) is to identify whether thisimpact is caused by large or small of unexpected news.

�IV = B� + E (4)

where B =

⎡⎢⎣

B1 0 0 00 B2 0 00 0 B3 00 0 0 B4

⎤⎥⎦; Bi = [ 1 S(L)i S(S)i ConVari ]S(L) is the surprise component of the

news announcement with the large surprise element (more than one standard deviation from themean); and S(S) is the surprise component of the news announcement with the small surprise element(less than one standard deviation from the mean).

We also include a set of control variables when we analyse the impact of scheduled news announce-ments considering the asymmetry of the surprise effect of the announcement. The intuition for theinclusion of these control variables is that on the day of the announcements other economic events canoccur which impact on IV. Bonser-Neal and Tanner (1996) suggest using the changes in the overall USmarket volatility as a control variable for economic and political variables not captured by the releaseof new information. We therefore include as a control variable, the first difference of the squared dailypercentage change of the S&P 500 (we denote this variable by Index). Since the market can interpretchanges in short-term interest rates as indications of monetary policy, which can have an impact on IV(Kim, 1999), we include as a control variable the daily change in the 90 days US T-Bills (we denote thisvariable by RiskFree). Central banks might consider intervene in the market when volatility increasessubstantially, and this can occur on the same day of the announcement. In order to control for thispossible simultaneity bias we include as a control variable the lag value of daily IV level (we denotethis variable by IV Lag) (Bonser-Neal and Tanner, 1996). Finally, due to the increased uncertainty in thefinancial markets because of the financial and economic crisis we considered separately our resultsfor the credit crunch period using a dummy variable (we denote this variable by Credit). The creditcrunch dummy takes value 1 if the dates are between July 30, 2007 and July 1, 2008 and 0 otherwise.14

ConVar denotes control variables, including controls for DOW and TOM.Regression (5) is to identify whether this impact is caused by positive or negative news.

�IV = C� + E (5)

where Ci = [ 1 S(P) S(N ConVar ]

14 We also extended the dates for our credit crunch dummy from the beginning of 2007 to end of 2008 and this did not changeour results.


S(P) is the surprise component of the news announcement with the positive surprise element(where realized value is greater than expected value); S(N) is the surprise component of the newsannouncement with the negative surprise element (where realized value is less than expected value).

In examining the asymmetric feature of the announcement effect, we are interested in the mag-nitude rather than the sign of the coefficients. The sign of the coefficient would indicate whetherparticular announcement is in line with the expected results, but would not explain the impact ofgood or bad (large or small) news. According to the announcement effect (Andersen and Bollerslev,1998), IV tends to increase prior to the news announcements indicating increased uncertainty. Asnews is released and assuming that the announced result is not very different from the expectedone, the source of the uncertainty disappears and IV falls again. However, if the announced resultsare different from expected IV tends to increase reflecting the increased uncertainty. The purpose ofthe regression models in Eqs. (3)–(5) is to capture the impact of large compared to small (positivecompared to negative) unexpected news on the FX IV, rather than to examine the direction of the IVmovements following the news announcement.

3. Results

In Table 4 we present the results of the impact of the news announcements (15 US macroeconomicscheduled announcements, the release of the minutes of the FOMC, the announcement of official USinterest rate changes and BOJ interventions) on the IV of the 4 FX rates for the announcement day(DAY), 5 days prior to the announcement (LAG) and 5 days following the announcements (FWD).15

3.1. Impact of scheduled US macroeconomic announcements on the FX IV

The large majority of the scheduled US macroeconomic announcements have an impact on IV inat least one of the time periods considered, the only exceptions are trade balance and CPI that do notinfluence FX IV. We find that Labour condition announcements (unemployment rate and non-farmpayroll) affect the IV of all four FX rates. The IV of USD/EUR and USD/JPY are the more sensitive to theUS macroeconomic indicator announcements. Seven scheduled macroeconomic announcements havean impact on the IV of USD/EUR and eight scheduled macroeconomic announcements have an impacton the IV of USD/JPY options. Overall, when the announcement of the macroeconomic indicator has animpact on IV, that impact tends to result in a decrease on the IV level on the day of the announcement.This result offers some support to the hypothesis that the release of information contained in scheduledannouncements of macroeconomic indicators reduces the market expectation of future volatility (IV)(Ederington and Lee, 1996; DeGennaro and Shrieves, 1997; Kim and Kim, 2004). We will consider thisfurther in the next section. There is no significant DOW impact (apart from increase in USD/EUR IV ona Friday, USD/GBP IV on a Monday and decrease in USD/GBP IV on a Thursday) therefore the resultsfor the news announcements are driving the impact on FX IV consistent with Nikkinen et al. (2007).We also test the model for a TOM effect, this supports our main significant results but does not findany significant TOM effect (results available from the authors on request).

Our finding of no specific impact for Trade Balance announcements on the FX IV supports someearlier studies (see Ederington and Lee, 1996), but contradicts Andersen and Bollerslev (1998), and Kimand Kim (2004). The inconsistency between the results could be due to the use of intra-daily ratherthan daily data in this study (which makes it more difficult to find an impact) and/or the differencesin the sample periods. This study focuses on the post 1998 period, which mainly covers the post Europeriod, but Kim and Kim (2004) covered a period prior to the introduction of the Euro in January1999. If the impact of the Trade Balance announcements on the FX IV weakened over time, then itwould be reasonable to expect the insignificant results reported in our study. The relation betweenTrade Balance figures and the US central bank intervention policy can also have an impact on ourresults. Although the introduction of the Euro is unlikely to explain the weakening impact of the Trade

15 During our period of analysis unemployment rate and non-farm payroll were announced on the same day and at the sametime. We therefore aggregate these two announcements in a new category entitled labour conditions (LABOUR).


Table 4Seemingly Unrelated Regression (SUR) results on the news announcements impact on foreign exchange implied volatility (IV)with day of week effect. This table reports the estimation results of the SUR regression using the change of IV as the dependentvariable. The explanatory variables include 15 US macroeconomic scheduled announcements, FMOC minutes, US interest ratechanges and BOJ interventions. We report the announcement day impact (DAY), 5 days prior to the announcements (LAG) and5 days following the announcements (FWD). We include a day of the week dummy (DOW).

Variables USD/EUR USD/GBP USD/CHF USD/JPY

�i t-stat. �i t-stat. �i t-stat. �i t-stat.

Constant 0.0005 0.16 0.0037 1.03 −0.0024 −0.56 0.0029 0.68Trade balance

DAY −0.0008 −0.25 −0.0005 −0.14 −0.0042 −0.96 −0.0016 −0.34LAG −0.0015 −0.76 −0.0031 −1.50 −0.0002 −0.09 −0.0000 −0.01FWD 0.0004 0.18 −0.0013 −0.58 0.0012 0.45 0.0011 0.42

Labor (unemployment and non-farm payroll)DAY −.0131*** −3.57 −0.0120*** −2.62 −0.0138*** −2.87 −0.0090* −1.75LAG 0.0034 1.45 −0.0003 −0.10 −0.0021 −0.67 0.0024 0.74FWD 0.0046 2.02 0.0011 0.43 0.0015 0.50 0.0049 1.53

CPIDAY −0.0003 −0.08 0.0018 0.43 0.0053 1.05 −0.0069 −1.29LAG 0.0032 1.28 0.0005 0.20 0.0015 0.45 0.0004 0.12FWD −0.0014 −0.58 −0.0019 −0.70 0.0001 0.04 −0.0018 −0.52

PPIDAY −0.0117 −3.28 −0.0122*** −3.08 −0.0026 −0.55 −0.0102** −2.05LAG −0.0042** −1.94 −0.0035 −1.44 −0.0001 −0.03 −0.0025 −0.83FWD −0.0004 −0.20 −0.0017 −0.71 0.0002 0.06 −0.0001 −0.04

Retail salesDAY −0.0086** −2.13 −0.0013 −0.29 −0.0108** −2.01 0.0030 0.52LAG −0.0027 −1.02 0.0012 0.41 −0.0027 −0.78 0.0019 0.52FWD −0.0008 −0.28 −0.0010 −0.34 −0.0022 −0.59 0.0040 1.02

Durable goodsDAY −0.0101*** −2.66 −0.0081* −1.88 −0.0022 −0.45 −0.0046 −0.86LAG −0.0036 −1.33 −0.0077 −2.54 −0.0035 −0.98 −0.0070* −1.83FWD −0.0040 −1.53 −0.0018 −0.62 0.0005 0.14 0.0048 1.31

Construction spendingDAY 0.0047 1.04 0.0019 0.38 0.0161*** 3.10 0.0043 0.66LAG 0.0036 1.07 0.0024 0.64 0.0071* 1.73 0.0063 1.35FWD −0.0022 −0.63 0.0048 1.25 0.0015 0.72 −0.0025 −0.52

GDPDAY −0.0125*** −3.45 −0.0036 −0.89 0.0001 0.01 −0.0179*** −3.53LAG −0.0009 −0.37 −0.0023 −0.92 0.0003 0.10 −0.0043 −1.34FWD 0.0017 0.72 0.0018 0.70 0.0043 1.44 −0.0038 −1.18

Current accountDAY 0.0015 0.28 0.0058 0.99 0.0121* 1.71 −0.0090 −1.20LAG 0.0021 0.82 0.0015 0.54 0.0022 0.65 0.0023 0.62FWD 0.0032 1.22 0.0019 0.67 −0.0015 −0.45 0.0047 1.29

Auto salesDAY −0.0025 −0.59 −0.0056 −1.18 −0.0023 −0.43 −0.011* −1.77LAG 0.0007 0.21 −0.0046 −1.28 −0.0040 −0.95 −0.0002 −0.05FWD −0.0003 −0.09 −0.0076** −2.16 −0.0010 −0.33 −0.0022 −0.48

Beige BookDAY −0.0046 −1.23 −0.0007 −0.15 −0.0051 −1.02 −0.0038 −0.73LAG 0.0009 0.51 0.0019 0.93 0.0012 0.48 0.0010 0.39FWD −0.0036* −1.91 −0.0018 −0.90 −0.0028 −1.12 −0.0025 −0.95Consumer confidence

DAY −0.0026 −0.73 0.0004 0.09 −0.0021 −0.44 −0.0064 −1.27LAG 0.0047** 2.28 0.0043 1.87 0.0010 0.37 −0.0002 −0.07FWD −0.0005 −0.22 0.0016 0.64 −0.0046 −1.57 −0.0021 −0.67

Industrial productionDAY 0.0010 0.24 −0.0034 −0.75 −0.0078 −1.43 0.0026 0.45LAG 0.0008 0.28 −0.0027 −0.84 −0.0009 −0.23 −0.0073* −1.85FWD 0.0003 0.09 −0.0019 −0.58 0.0011 0.29 −0.0034 −0.86

Leading IndicatorsDAY −0.0020 −0.62 −0.0023 −0.62 0.0080* 1.86 −0.0083* −1.84LAG 0.0011 0.61 0.0016 0.79 −0.0030 −1.18 0.0004 0.15


Table 4 (Continued)

Variables USD/EUR USD/GBP USD/CHF USD/JPY


FWD 0.0007 0.38 −0.0005 −0.25 −0.0013 −0.52 −0.0005 −0.19Housing starts

DAY −0.0058 −1.46 −0.0005 −0.12 −0.0021 −0.40 −0.0053 −0.95LAG −0.0008 −0.30 0.0009 0.29 0.0038 1.09 0.0040 1.04FWD −0.0007 −0.26 0.0032 1.06 −0.0001 −0.03 0.0091** 2.44

FOMC minutesDAY −0.0053 −1.34 −0.0045 −1.02 −0.0066 −1.26 −0.0064 −1.14LAG −0.0026 −1.37 −0.0007 −0.30 0.0020 0.78 −0.0014 −0.53FWD −0.0006 −0.33 0.0000 0.02 0.0024 0.96 0.0012 0.43

US ratesDAY 0.0006 0.12 0.0082 1.52 0.0013 0.20 −0.0050 −0.74LAG −0.0001 −0.03 0.0036 1.42 0.0010 0.33 −0.0003 −0.10FWD −0.0022 −0.97 −0.0007 −0.29 −0.0004 −0.14 −0.0046 −1.43

BOJDAY 0.0067** 2.07 0.0149*** 4.03 0.0078* 1.77 −0.0047 −1.04LAG 0.0037 1.60 −0.0010 −0.39 0.0038 1.21 0.0122*** 3.76FWD −0.0058*** −2.52 −0.0061** −2.33 −0.0042 −1.34 −0.0100*** −3.07

DOWMonday 0.0017 0.70 0.0144*** 5.36 0.0040 1.25 −0.0021 −0.63Tuesday −0.0004 −0.15 0.0035 1.22 0.0034 1.05 0.0011 0.33Wednesday 0.0034 1.42 0.0015 0.51 0.0036 1.12 −0.0007 −0.22Thursday 0.0031 1.42 −0.0079*** −2.80 0.0047 1.45 0.0016 0.48Friday 0.0067*** 2.84 −0.0021 −0.70 0.0002 0.07 0.0020 0.60R2 0.048

* Significance at the 10% level** Significance at the 5% level.

*** Significance at the 1% level.

Balance announcements on the FX IV, it could still indirectly contribute by its influence on the centralbank intervention policy (see Deravi et al., 1988). Since the interventions have become less commonreducing the market expectations of any intervention regardless of the announced trade deficit figures,one would expect the impact of trade balance announcement on the FX IV to become less significant.

The announcement of the CPI also does not affect the level of IV. Nevertheless, the announcementsof PPI generally decrease the level of IV.16 Both the CPI and the PPI are inflation indicators althoughthe latter represents the cost of goods to producers, but the former represents the cost of living toconsumers. Since both indexes closely linked inflation indicators, the market might react only to therelease of one of the indexes. Moreover, since during our time period of analysis, the PPI was generallyannounced first (there were 144 announcements of each of the indexes with the PPI being announcedbefore the CPI 126 times), it seems that the market perceives the PPI announcement as the inflationindicator news, and does not perceive any extra information on the later release of the CPI level.17

3.2. Announcement day impact of scheduled macroeconomic indicators

Table 4 shows that, on the day of the announcement, nine out of the 15 macroeconomic indicatorannouncements have a significant impact on the IV of at least one exchange rate. The level of IVon the USD/EUR is significantly affected by the macroeconomic announcement of labor conditions,retail sales, durable goods and GDP. The announcement of labor conditions, PPI and durable goodssignificantly affect the IV of USD/GBP options. The announcement of labor conditions, retail sales,construction goods, current account and leading indicators, significantly affect the IV level of optionson USD/CHF. Lastly, the announcement of labor conditions, PPI, GDP, auto sales and leading indicatorsaffect the level of IV of USD/JPY options.

16 The exception is the IV for USD/CHF which is not affected by PPI announcements.17 Nikkinen and Sahlström (2004) came to the similar conclusion that the market mainly reacts to the PPI release.


Generally, as briefly discussed in Section 3.1, our results show that when the announcement ofthe macroeconomic variables has a significant effect on IV, this effect results in a decrease of the IVlevel.18 Since IV is a measure of the market expectation of future volatility, assuming efficient mar-kets, Ederington and Lee (1996) suggest that, prior to the announcement, the (expected) informationcontent of scheduled announcements is already reflected in the IV. Therefore, prior to the announce-ment the IV level should be higher, since the market knows that on the day of the announcementthe information release can lead to significant changes in the prices of underlying securities. On theannouncement day, the previous uncertainty associated with the expected announcement disappears,meaning that this uncertainty is resolved. If the information contained in the announcement does notlead to significant revisions in the expectations of future volatilities, the IV is expected to drop onthe announcement day.19 Conversely, if the information contained in the announcement does lead tosignificant revisions in the expectations of future volatilities, the IV level might be adjusted upwardsor downwards. Our results offer some support that the announcement of macroeconomic indicatorssolves some of the market uncertainty, leading to a drop in IV (Ederington and Lee, 1996).

Our results are also broadly consistent with Kim and Kim (2004) but those authors report a weakerannouncement impact on IV.20 Dominguez and Panthaki (2005) found that news which arrive duringperiods of high uncertainty have a more significant effect on the FX rates than news that arrive in calmerperiods. In addition, Remolona et al. (1995) suggested that financial markets are more sensitive to newsreleases in periods when the Fed. is expected to be implementing policies that are more restrictive.During the sample period of 1998–2009, which covers the first 10 years after the introduction of Euro,the major central banks were under pressure to cut interest rates due to the economic slowdown inthe world’s major economies. Moreover, the recent economic crisis further pressured central banksto cut interest rates. Thus, the introduction of the Euro and the economic conditions over our sampleperiod could have added to market uncertainty and thus might explain the stronger sensitivity of theFX IV level to macroeconomic indicators announcements.

The announcement of US construction spending, current account and leading indicators result ina positive impact on the IV of USD/CHF. A possible explanation could be that these particular releasesresult in unexpected announcements that resulted in upward revisions by market participants of theexpected future volatilities causing an increase in the IV on the announcement day (we will examinethe impact of the unexpected element of the news release in Section 3.6).

Although a number of the macroeconomic announcements have a significant impact on IV level,their economic significance is small. The coefficients in Table 4 should be interpreted as the percent-age change in IV following the announcement of the respective macroeconomic indicator. Therefore,for example, the coefficient of −0.0131 represents the average percentage change in the daily IV onUSD/EUR on the day of the announcement of labor conditions. More meaningfully, assuming that IVof USD/EUR options was 10.35% (the average of our period of analysis), on the announcement dayof labor conditions, IV will drop to 10.21% (10.35 − (10.35 × 0.0131)). These results suggest that themacroeconomic indicators’ announcements do not have a strong economic impact on the level of IV(the largest coefficient in Table 4 suggests a percentage decrease of 0.0179). Nevertheless, it is impor-tant to highlight that the reported coefficients concern daily changes in IV and that the cumulativeeffect of the announcement impact over a full year can be large. As an example, in our sample periodthere was an average of 12 labor conditions announcement on each year, which results in a cumulativeeconomic significant drop in volatility over 1 year.

18 The announcement of US auto sales only affects (negatively) the IV of USD/JPY. Clearly, this is explained by the importanceof Japanese car exports and therefore car sales in USA for the Japanese economy.

19 Ederington and Lee (1996) show that the daily change in IV can be explained by the revisions in the expectations regardingfuture volatilities and the drop of the anticipated volatility of that day. Thus, assuming that there are no significant revisions inthe expectations of future volatility, IV should drop on the announcement day of important news. In other words, if we think ofIV as an average of the future daily volatilities during the life of the options (Merton, 1973), the drop of the expected volatilityof the announcement day will lead to lower IV (since the expected volatility of the announcement day will be higher than theexpected volatility of the days with no announcements).

20 In Kim and Kim (2004) only two economic indicators announcements had a significant effect on the IV level of the USD/DMand of USD/GBP and the announcement of three economic indicators impact the level of USD/JPY and USD/CHF.


3.3. Pre-announcement impact of macroeconomic indicators

The anticipation of the announcement could lead speculative risk taking traders to open their posi-tions hoping to profit from personal believes. Alternatively, risk averse traders could choose to closetheir positions before the announcement date in order to avoid surprises. Moreover, private infor-mation can also lead to increases in trading activity.21 The increase in the trading activity prior tothe announcement date will result in an increase in actual volatility. However, Jones et al. (1998)suggest that the anticipation of macroeconomic news announcements should have a “calming” effectin the market. Since the market expects an increase in volatility in the announcement day, prior tothe announcement, dealers can reduce their trading.22 These potential effects could also lead mar-ket participants to review their future expectations of market uncertainty and thus affect the levelof FX IV prior to the announcement day. The results in Table 4 show that generally the anticipationof the macroeconomic announcements do not have an effect on the IV of the FX options prior to theannouncement day. Thus, the trading flow before the announcement day does not seem to result inmarket revisions of the expected future levels of uncertainty before the announcement day. Excep-tions are PPI that has a negative pre-announcement effect on USD/EUR, consumer confidence that hasa positive effect also on USD/EUR, construction spending which has a positive effect on USD/CHF, anddurable goods and industrial production that both have a negative effect on USD/JPY (only two coef-ficients are significant at the 5% level and thus the support of the revision of expectations hypothesesprior to the announcements for construction goods, durable goods and industrial production is weak).

3.4. Post-announcement impact of macroeconomic indicators

Jones et al. (1998) suggest that the release of new information to the market can result in a volatilityshock that persists beyond the announcement date. This persistence might occur due to the clusteringof information arrivals, market sentiment or gradual learning (they found no evidence of volatilitypersistence in the Treasury bond market). Bauwens et al. (2005) suggest that a post-announcementvolatility increase can be attributed to heterogeneity of interpretations of the contents of the newsthat can lead to delayed surprise reactions and closing of positions based on prior anticipations. Theliterature that analyses the persistence of volatility shocks concentrates in actual volatility. In termsof FX IV, the results in Table 4 show no significant evidence of an adjustment in the expectations offuture market uncertainty (IV) on the 5 days following the announcements. If markets are efficientand market participants are aware of volatility shocks then they should incorporate those volatilityshocks in their expectations. The only significant coefficients are the beige book on USD/EUR (at 10%significance level), auto sales on USD/GBP and housing starts on USD/JPY (both at 5% significance level).These announcements result in a post-announcement negative impact on IV.

3.5. Impact of other news announcements on IV

In Table 4, we show the impact on IV of the announcement of FOMC minutes, changes in US interestrates and of BOJ interventions. Table 4 shows that the announcement of the FOMC minutes and ofchanges in the interest rate do not have an impact on the IV level. Suggesting that those announcementsdid not lead to significant revisions of the market expectation of future volatility (IV) (consistent withthe literature on the correlation between FX volatility and the interventions conducted by other centralbanks, see Bonser-Neal and Tanner, 1996; Bauwens et al., 2005). On the day of the BOJ announcement,the IV of USD/EUR, USD/GBP and USD/CHF significantly increases (opposite to the results obtained forthe scheduled macroeconomic news announcements). Our announcement result is consistent withEderington and Lee (1996) who suggest that unscheduled announcements tend to result in volatility

21 DeGennaro and Shrieves (1997) suggest that informed traders time their trades to occur during periods of high tradingactivity to maximize potential profit that comes from the private information and therefore informed trading indeed causesvolatility to increase. In the absence of the private information, volatility would increase only after the news announcement,but the existence of the private information would be associated with the increased volatility prior to the announcement.

22 For evidence of a reduction in actual volatility before the announcement date, see Jones et al. (1998) and Bomfim (2003).


on the announcement day that is larger than expected. Both the inventory-based approach and theinformation-based approaches in the microstructure literature could explain the finding of a positiverelation between BOJ interventions and the FX market volatility in the short run.23 The differencebetween the reaction of the FX IV to the announcement of the scheduled news releases and centralbank intervention could be the awareness of the market about the event. It is possible that the less themarket knows about central bank interventions the more likely volatility would increase as the resultof this intervention. Given that some of the central bank interventions do not even become public news,it could be expected that such “secret” interventions tend to cause larger increases in volatility thanthe interventions reported in the financial press. The main reason is that such “secret” interventionsare less well understood by the market participants (and the financial press). This misunderstandingcould explain why the results of this study are much more statistically significant than the results ofBonser-Neal and Tanner (1996) as they used financial press intervention releases as the proxy for BOJinterventions.

The significant increase in volatility is then followed by a significant decrease in the days afterthe announcement (FWD is significant for USD/EUR, USD/GBP and USD/JPY). This could indicate thatsome of the uncertainty caused by the BOJ intervention is removed in the days following the announce-ment. We also note that there is a positive relation between the interventions of the BOJ and the IV ofUSD/JPY prior to the event (LAG). Although the intervention is not usually anticipated there could beinformation leakage leading to the presence of informed traders who exploit their privileged informa-tion and update their revision of expected future volatility especially in relation to the Japanese Yen(DeGennaro and Shrieves, 1997).

3.6. Impact of unexpected news of scheduled announcements on the FX IV

Ederington and Lee (1996) suggest that the announcement of scheduled information should notlead (on average) to significant revisions in the level of IV. This is expected to happen since the normaleffect of the announcement should already be incorporated in the expectations of future volatilities.According to the authors, as scheduled information is released market participants can indeed revisetheir future expectations of volatility, but on average, upward and downward revisions will cancel out.In this section we investigate if the extent (large compared to small) of the surprise, and the sign (goodcompared to bad) of the surprise influences differently on market expectations of future volatility.

Madura and Tucker (1992) and Aggarwal and Schirm (1998) report asymmetry on the volatilityand FX rates reactions to the announcement of scheduled macroeconomic information. Madura andTucker (1992) report that larger market surprises of trade balance result in larger increases in IV,but Aggarwal and Schirm (1998) show that FX rates were less responsive to large surprises in tradebalance. Aggarwal and Schirm (1998) suggest that central banks have access to the economic figures(e.g. trade balance) prior to the announcements and can intervene in the market if the magnitudeof the unexpected component of the release is large, making other market participants reluctant totrade. If the surprise element is small, a central bank seems to be unwilling to spend resources forthe intervention, attracting other participants to the market. Therefore, the announcements with thelarge unexpected component can make the majority of the participants reluctant to trade due to thefear of the central bank intervention or even the fear of major market players closing open positionsin response to the significantly unexpected news. Since the market does not expect significant inter-ventions and shocks, following the news announcements with the small surprise element, the market

23 The inventory-based approach (Lyons, 2001) emphasizes the balancing problem on FX markets resulting from stochasticinflows and outflows deviations caused by a policy intervention. According to this approach, these deviations will be temporaryand last until portfolios are rebalanced. The information-based approach focuses on the process of learning and price formationon markets. In high volatility periods, much trading can take place as informed trades can easily hide the volume of theirtransactions. This approach predicts an increase in transactions volume and volatility following a central bank intervention.Once the intervention news has been revealed, transaction volume, prices and volatility should revert to their pre-interventionlevels. Longer-run effects are related to factors such as information processing, but more volatile market conditions mightrequire more time to revert to their initial levels.


participants prefer to trade after the news releases with small-unexpected component, which drivesIV up.

In Table 5, we report the effect of large and small announcements on IV.24 The table shows some(weak) evidence of an asymmetric reaction of IV to scheduled announcements. If we concentrate inthe results with statistical significance at 5% level or less we can see that the announcement of CPI,durable goods, auto sales, industrial production, leading indicators, unemployment rate, non-farmpayroll and current account show some evidence of producing an asymmetric response in IV but thatthese results are not consistent across the IV of the four FX rates. Moreover, the results show noclear pattern, meaning that the larger effects in IV can result from larger or smaller announcementsurprises depending on the economic announcement. Larger surprises have a stronger effect on IV forthe announcement of CPI, industrial production, unemployment rate and durable goods for the IV ofoptions on USD/CHF. Conversely, smaller surprises have a stronger effect on IV for the announcementof auto sales, leading indicators, non-farm payroll, current account and durable goods for USD/GBP.Aggarwal and Schirm (1998) reported that their results for the equity and FX return series werenot consistent within different time periods. Our results show that the effect of the dimension ofthe surprise is also not consistent across the different FX rates and the type of announcement. Itis interesting to notice, that contrary to the results in Table 4, Table 5 suggests that on the day ofthe announcement the release of information on CPI and industrial production does seem to havean impact on the IV level. This indicates that only the large surprises on the content of these twoannouncements lead to market revisions of IV.

We also report the impact on FX IV of four control variables in Table 5.25 The results for the IV lagare broadly consistent with the results of Bonser-Neal and Tanner (1996). The results show that asexpected, the level of IV of the previous day has a significant (negative) effect on the daily change of IV(although not significant for USD/EUR). Thus, smaller volatility levels are more likely to result in largerchanges in IV. The measure of overall US market volatility (Index) generally does not seem to impact onIV. Our results seem to indicate that the IV of USD/EUR, USD/GBP and USD/JPY already incorporates thecurrent market volatility (Index). In other words, if the market expectations of the future volatility ofthe FX options already anticipated the changes in US market volatility, those changes should not affectIV.26 The exception to this result is for the IV on USD/CHF that increases as the US market volatilityincreases. The risk-free change (RiskFree) does not affect the changes in IV. Surprisingly, given theexpected uncertainty in the markets, the changes in IV are not significantly different during the creditcrunch period (Credit), except again for the IV on USD/CHF, that shows an increase in IV during thecredit crunch period. However, as our dependent variable is the change in IV this is not entirelyunexpected as the long-term information that could be affected by the credit crunch is removed inthis variable.27

In Table 6, we report the impact on IV of good compared to bad news.28 Only the announcement offour out of the 15 US macroeconomic indicators show a sign effect. Moreover, for those four cases this

24 Note that in Tables 5 and 6, we distinguish between non-farm payroll and unemployment rate and do not use the combinedLABOUR announcement used in Table 4. We can make this distinction here since we are now concentrating on the extentof the surprise which can be different for non-farm payroll and unemployment rate. However, we exclude the Beige Bookannouncement.

25 Our regression control, in Tables 5 and 6, for the seasonality (DOW and TOM) effects on IV finds no significant pattern acrossthe four FX supporting the finding that the news announcements are driving the impact on FX IV. For the regression in Table 5we do find FX IV increasing more in the middle of the week (with a significant increase in IV on Tuesdays) which is consistentarguments that higher changes in volatility in the middle of the week could be due to trading patterns of FX markets. Theseresults are available from the authors on request.

26 Another possible explanation for our result would be that although overall market volatility affects IV, overall marketvolatility mainly occurs due to the surprise of main economic variables. This is nevertheless unlikely to be the case.

27 In Table 4 we wanted to concentrate on the news announcement impact on FX IV and did not include the controls. However,as a further test we did include the controls in our Table 4 regression. This did not generally change any of the results reportedin Sections 3.1–3.6 and the significance of the IV Lag control discussed in Table 5.

28 In Table 6, we also report the results for our four control variables. Since the results for our control variables are very similarto those reported for Table 5 (support for a negative impact of IV Lag on three FX IV and a positive impact for USD/CHF for USstock market volatility) we do not discuss those results in detail. Note the difference between the credit crunch period on theUSD/CHF IV is not significant in Table 6.


Table 5Impact of large compared to small surprise element of the macroeconomic announcements on foreign exchange implied volatil-ity (IV). This table presents the results of the seemingly unrelated regression (SUR) for the change of IV for the four FX rates, asdependent variables. The explanatory variable definitions are as follows: the news with large (more than one standard deviationfrom the mean) surprise element (large); the previous change of IV (IV lag); the change in the risk free rate (risk free change)and the first difference of the squared percentage change in the S&P 500 index (index). The Credit dummy explanatory variableis coded one if the dates are in July 30, 2007 and July 1, 2008, 0 otherwise.



Constant −0.005 −2.96*** −0.004 −1.87* −0.005 −1.56 −0.003 −1.19Trade balance

Large −0.002 −0.24 0.010 1.04 −0.002 −0.23 0.000 0.01Small −0.003 −0.87 −0.001 −0.35 −0.000 −0.04 −0.001 −0.19

UnemploymentLarge 0.003 0.37 0.011 1.39 −0.019 −1.98** 0.012 1.09Small −0.001 −0.22 −0.004 −0.56 −0.012 −1.34 −0.018 −1.91*

CPILarge 0.015 1.78* 0.021 2.14** 0.018 1.55 0.020 1.69*

Small −0.003 −0.78 −0.003 −0.60 −0.005 −0.96 0.005 0.79PPI

Large −0.011 −1.27 −0.003 −0.36 0.012 1.13 0.008 0.63Small 0.005 1.49 −0.000 −0.01 0.002 0.36 0.006 1.27

Retail salesLarge 0.001 0.06 0.013 1.09 −0.010 −0.70 −0.001 −0.05Small −0.000 −0.04 −0.004 −1.16 −0.003 −0.72 −0.005 −1.10

Durable goodsLarge −0.002 −0.29 −0.002 −0.18 −0.028 −2.61*** 0.000 0.00Small −0.005 −1.71* −0.007 −2.02** −0.005 −1.12 −0.006 −1.30

Construction spendingLarge −0.046 −1.39 −0.024 −0.66 −0.030 −0.68 0.007 0.15Small 0.004 1.09 0.005 1.25 −0.003 −0.60 0.008 1.72*

GDPLarge −0.007 −1.03 −0.001 −0.15 −0.009 −0.96 0.010 0.98Small 0.006 1.58 0.001 0.16 −0.001 −0.17 0.003 0.62

Current accountLarge −0.005 −0.15 −0.012 −0.34 −0.005 −0.12 −0.066 −1.43Small 0.006 1.06 0.004 0.71 0.005 0.70 0.016 2.11**

Auto salesLarge 0.008 0.96 0.006 0.64 0.007 0.66 −0.004 −0.31Small 0.010 2.63*** 0.001 0.22 0.005 1.02 0.009 1.73*

Consumer confidenceLarge 0.011 1.41 0.006 0.78 −0.003 −0.29 0.001 0.08Small 0.003 0.92 0.002 0.52 −0.002 −0.35 −0.004 −0.86

Industrial productionLarge −0.022 −2.21** −0.010 −0.96 −0.022 −1.72* −0.007 −0.48Small 0.001 0.25 −0.004 −1.05 −0.002 −0.50 0.003 0.64

Leading indicatorsLarge −0.012 −1.32 −0.003 −0.28 −0.006 −0.52 −0.018 −1.47Small 0.002 0.49 0.008 1.97** 0.007 1.46 0.003 0.63

Non-farm payrollLarge −0.006 −0.68 −0.011 −1.07 −0.006 −0.49 0.004 0.32Small 0.006 1.10 0.003 0.51 0.016 2.25** 0.004 0.47

Housing startsLarge 0.004 0.51 −0.004 −0.46 0.002 0.18 0.012 1.10Small 0.004 1.11 0.002 0.45 −0.002 −0.43 0.000 0.05

Control variablesIV Lag −0.009 −0.53 −0.105 −6.00*** −0.150 −8.70*** −0.042 −2.39**

Risk free −0.029 −0.91 −0.033 −0.92 0.024 0.56 −0.038 −0.86Index 3.708 0.85 7.325 1.51 12.465 2.13** 5.308 0.87Credit 0.002 0.51 −0.001 −0.28 0.011 2.26** 0.001 0.25R2 0.050

* Significant at 10% significance level.** Significant at 5% significance level.

*** Significant at 1% significance level.


Table 6Impact of positive compared to negative surprise element of macroeconomic announcements on foreign exchange impliedvolatility (IV). This table presents the results of the seemingly unrelated regression (SUR) results for the change of IV for thefour FX rates, as dependent variables. The explanatory variable definitions are as follows: news with positive (where realizedvalue is greater than expected value) surprise element (positive); the news with small (where realized value is less than expectedvalue) surprise element (negative); the previous change of IV (IV lag); the change in the risk free rate (risk free) and the firstdifference of the squared percentage change in the S&P 500 index (Index). The credit dummy explanatory variable is coded one ifthe dates are in July 30, 2007 and July 1, 2008, 0 otherwise (Credit). Monday–Friday are dummy variables coded if the dates are inMonday–Friday respectively, 0 otherwise (DOW). Positive surprises of Retail Sales, Durable Goods, Construction Spending, GDP,Auto Sales, Consumer Confidence, Industrial Production, Leading Indicators and Housing Starts as well as negative surprises ofTrade Balance, Unemployment, CPI, PPI, Current Account and Non-Farm Payroll are considered favorable news.



Constant −0.005 −3.03*** −0.004 −1.81* −0.005 −1.56 −0.003 −1.15Trade balancePositive −0.000 −0.01 0.006 1.25 −0.001 −0.16 −0.005 −0.77Negative −0.004 −1.02 −0.005 −1.11 0.001 0.11 0.002 0.43UnemploymentPositive 0.001 0.17 0.008 1.12 −0.014 −1.58 −0.006 −0.58Negative 0.002 0.26 −0.005 −0.63 −0.017 −1.79* −0.007 −0.70CPIPositive 0.003 0.59 −0.003 −0.46 −0.006 −0.88 0.002 0.31Negative −0.004 −0.92 0.003 0.63 −0.000 −0.00 0.010 1.46PPIPositive 0.006 1.41 0.002 0.49 0.010 1.65* 0.011 1.74*

Negative 0.001 0.13 −0.003 −0.69 −0.003 −0.47 0.003 0.47Retail salesPositive 0.005 1.06 −0.001 −0.21 0.003 0.56 0.001 0.16Negative −0.004 −0.97 −0.005 −0.98 −0.009 −1.65* −0.010 −1.58Durable goodsPositive −0.003 −0.79 −0.007 −1.44 −0.010 −1.89* −0.007 −1.22Negative −0.007 −1.64 −0.007 −1.46 −0.004 −0.77 −0.003 −0.52Construction spendingPositive 0.006 1.43 0.006 1.27 −0.000 −0.08 0.011 1.83*

Negative 0.001 0.15 0.003 0.66 −0.004 −0.66 0.004 0.59GDPPositive 0.001 0.13 −0.001 −0.22 −0.004 −0.78 0.010 1.58Negative 0.006 1.36 0.002 0.38 0.001 0.14 −0.001 −0.22Current accountPositive 0.002 0.25 −0.006 −0.63 0.003 0.22 0.013 1.04Negative 0.009 1.35 0.010 1.37 0.007 0.81 0.016 1.63Auto salesPositive 0.010 2.23** −0.001 −0.17 0.002 0.36 0.004 0.65Negative 0.008 1.68* 0.004 0.73 0.008 1.34 0.010 1.52Consumer confidencePositive 0.005 1.28 0.007 1.59 −0.006 −1.10 −0.001 −0.18Negative 0.004 0.88 −0.002 −0.50 0.003 0.47 −0.006 −0.93Industrial productionPositive 0.006 1.36 −0.003 −0.57 0.004 0.62 0.006 0.95Negative −0.005 −1.22 −0.004 −0.92 −0.008 −1.50 0.000 0.04Leading indicatorsPositive −0.004 −0.69 −0.000 −0.05 0.006 0.95 0.006 0.80Negative 0.003 0.69 0.014 2.54** 0.005 0.76 −0.005 −0.65Non-farm payrollPositive 0.011 1.78* 0.008 1.18 0.011 1.42 0.007 0.80Negative −0.002 −0.27 −0.005 −0.68 0.015 2.00** 0.001 0.14Housing startsPositive −0.003 −0.73 −0.002 −0.55 −0.003 −0.50 0.001 0.11Negative 0.012 2.83*** 0.005 1.15 0.002 0.38 0.005 0.77Control variablesIV Lag −0.006 −0.33 −0.103 −5.94*** −0.147 −8.54*** −0.041 −2.36**


Table 6 (Continued)



Risk free −0.027 −0.87 −0.039 −1.10 0.024 0.58 −0.042 −0.95Index 3.439 0.79 6.647 1.37 12.810 2.19** 5.593 0.91Credit 0.001 0.38 −0.000 −0.11 0.010 2.16 0.001 0.19R2 0.049

* Significant at 10% significance level.** Significant at 5% significance level.

*** Significant at 1% significance level.

effect is only observed in one of the FX rates (at 5% or less significance level). Positive (the realized figureis larger than the expected one) releases of auto sales result in an increase of IV of USD/EUR. Negative(the realized figure is smaller than the expected one) releases of non-farm payroll, housing starts andleading indicators result in an increase in the IV of respectively USD/CHF, USD/EUR and USD/GBP. Theresult that the changes in IV react similarly to positive and negative surprises might seem surprising.If the announcement of new information leads to revision by market participants of their expectationsfor the future level of uncertainty, we could expect that bad news have a stronger effect than goodnews. Laakkonen (2007) and, to some extent, Bauwens et al. (2005) document a relatively strongerimpact of negative (as opposed to positive) news. Our results do not show evidence that the marketreacts more strongly to negative news since for the large majority of the announcements there is nodifference between the reaction of IV to positive and negative news. Moreover, positive news canhave a stronger impact on IV than negative news (auto sales). Our results suggest that the evidence ofnegative surprises having greater IV impact than positive surprises seems to have weakened over time.The two major strands of literature, which try to explain asymmetry in the response of FX rates to news,suggest that negative news in good times should have unusually large impact on the FX market IV (aview that is also common in the practitioner community). The main idea of both strands is that whenthe economic conditions are favorable, bad news generates strong response, because it is a surprise,causing an IV jump. Conversely, good news generates a weaker response since they are anticipated.In other words, in good times good news are expected and bad news are a surprise. Given that, moststudies on the sign effect covered 1990s, a period characterized by favorable market conditions; itis not surprising that the literature found evidence of a strong sign effect. However, the post Europeriod covered by this paper (1998–2009) includes both the slowdown in the major economies, andthe occurrence of a major credit crisis which could have led market participants to more frequentlyexpect bad news. As a result, the IV impact of negative releases of most macroeconomic indicators in1998–2009 period is weaker than the impact of the same indicators in the pre-Euro era.

4. Conclusion

Understanding IV patterns is important for risk management and trading. This paper investigatesthe impact of news announcements of 16 major US macroeconomic indicators, the FOMC minutes, offi-cial US interest rate announcements and BOJ interventions on the IV of four major FX rates from 1998to 2009. The results indicate that FX market IV tends to increase on the announcement day of impor-tant US macroeconomic indicators. Therefore, the announcement of macroeconomic indicators solvessome of the market uncertainty, leading to a drop in FX IV. There is no significant evidence that daysbefore and after the announcement lead to significant revisions in IV. These results indicate that thereis little evidence of private information and that market participants in their expectations of futureuncertainty already incorporate the effect of persistence of volatility shocks. We find that comparedto the Deutsche Mark, the Euro has become more sensitive to the US macroeconomic announcementson the announcement days. This result could be explained by an increased uncertainty caused by theintroduction of Euro. We find that the impact of the macroeconomic announcements’ surprise elementon the FX IV is not significant for most indicators implying that the mere release of the macroeconomicindicators, rather than the surprise news, affects FX market IV. This seems to indicate that as suggested


by Ederington and Lee (1996) the announcement of scheduled macroeconomic variables resolves mar-ket uncertainty. In addition, we provide evidence of a weakening sign effect over time since contrary toprevious studies we do not find significant evidence that bad news impact on IV differently than goodnews. The results show that as expected, the level of IV of the previous day has a significant (negative)effect on the daily change of IV. Thus, smaller volatility levels are more likely to result in larger changesin IV. Lastly, we do not find any affect on FX IV levels of the release of the minutes of the FMOC and USinterest rate changes, but find a significant increase in the FX IV on the BOJ FX intervention day. Thissupports existing literature and can be explained by the flow of new unexpected information into themarket.

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Impact of news announcements on the foreign exchange implied volatility