Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction
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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.
Series:
Working Paper No. 2017/091
Subject:
Central bank policy rate Currencies Currency markets Exchange rates Financial markets Financial services Foreign exchange Money
English
Publication Date:
April 7, 2017
ISBN/ISSN:
9781475593488/1018-5941
Stock No:
WPIEA2017091
Pages:
37
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