Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction
IMF Working Papers, April 7, 2017
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Bibliographic details
- Authors: Barry J. Eichengreen, Romain Lafarguette, Arnaud Mehl
- Published: April 7, 2017
- Series: IMF Working Papers
Overview
- Research question: Impact of technology on financial market reaction to information, with a focus on the foreign exchange market.
- Competing hypotheses:
- “Thin-skinned”: technological improvements cause markets to react more to new information.
- “Thick-skinned”: technological improvements cause markets to react less to new information.
Methodology
- Identification strategy: Pinpoint exogenous technological changes using the timing of the connection of countries via submarine fiber-optic cables used for electronic trading.
- Empirical focus: Response of exchange rates to macroeconomic news and to U.S. monetary policy news.
Key findings
- Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned” hypothesis.
- Interpretation: Technology eases access to information and reduces trend-following behavior.
- Quantitative estimate: Cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.
Implications and interpretation
- Increased connectivity via submarine fiber-optic cables is associated with weaker immediate exchange-rate reactions to macro announcements.
- The evidence supports a view of technological adoption that moderates market sensitivity to policy news by improving information access and reducing momentum-driven trading.
Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction, Barry J. Eichengreen, Romain Lafarguette, and Arnaud Mehl, April 7, 2017; IMF Working Paper No. 2017/091.