Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction

By Barry J. Eichengreen, Romain Lafarguette, Arnaud Mehl

April 7, 2017

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Format: Chicago

Barry J. Eichengreen, Romain Lafarguette, and Arnaud Mehl. Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction, (USA: International Monetary Fund, 2017) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the impact of technology on the reaction of financial markets to information, focusing on the foreign exchange market. We contrast the “thin-skinned” view that technological improvements cause markets to react more to new information with the “thick-skinned” view that they react less. We pinpoint exogenous technological changes using the timing of the connection of countries via the submarine fiber-optic cables used for electronic trading. Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned” hypothesis. This is in line with the view that technology eases access to information and reduces trend-following behavior. According to our estimates, cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.

Subject: Central bank policy rate, Currencies, Currency markets, Exchange rates, Financial markets, Financial services, Foreign exchange, Money

Keywords: Cable connection, Cable network, Central bank policy rate, Currencies, Currencies of country, Currency markets, Exchange rates, Fiber optic cable, Foreign Exchange Market, Global, Interest rate, Macro Announcements, Market participant, Market reaction, Policy interest rate news, Policy news, S&P 500, Standard deviation, Submarine cable, Submarine Fiber-Optic Cables, Technology, Trading location, Trading strategy, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/091
Stock No:

WPIEA2017091
ISBN:

9781475593488
ISSN:

1018-5941

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