of news. In other words, unlike the aforementioned studies we are able to address whether exchange rates
respond to only the surprise component of news. In addition, the inclusion of all three news variables in
our analysis makes it possible to assess the importance of focusing on the surprise component of news by
comparing the exchange rate response to news when news are measured properly (i.e. when separating
the surprise component from the actual announcement) to the exchange rate response to news when news
are measured improperly (i.e. when measuring news as simply the news announcement itself). This
facilitates a comparison of our findings to the findings of studies that do not distinguish between
announcement and surprise component.
Both the predictions of standard asset pricing theory and the survey responses from currency
traders reported in Cheung and Chinn (2001) suggest that the effects from macro news announcements
are quickly absorbed in prices. Nevertheless, there is no consensus in the empirical literature on exchange
rates and macro news in regards to how fast the absorption process really is. For example, Andersen,
Bollerslev, Diebold and Vega (2003) find that exchange rates generally respond within five minutes of the
news announcement (characterized by a jump immediately following the announcement and little
movement thereafter) while Faust and Rogers (2003) and Faust, Rogers, Swanson and Wright (2003) in
the context of identified (recursively or not) VAR models show confidence intervals consistent with
exchange rate responses occurring anywhere from instantaneously to five years after the news
announcement. Similarly, Evans and Lyons (2005) find delayed exchange rate responses several days
after the news occurred while Simpson, Ramchander and Chaudry (2005) show that exchange rates
respond to news within the same day as the news are announced. Our analysis also adds to the literature
on how quickly exchange rates respond to monetary policy news.
We focus our investigation on the 42 US monetary policy changes that occurred during the 1989
to 2000 time-period and we follow Kuttner (2001) and Faust, Rogers, Swanson and Wright (2003) and
use data on Fed funds futures for isolating the surprise component of each of these actual policy
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