GOVERNMENT DEBT ANNOUNCEMENTS, MARKET USE OF INFORMATION, AND THE BEHAVIOR OF EXCHANGE RATES
CHARLES E. HECJI, M. KEIVAN DERAVI, AND PHILIP GREGOROWICZ
Numerous studies have measured the response of foreign exchange rates to the receipt of new information. 1 This chapter extends the study of the information used by market participants in forming exchange rates.
First, we study the market response of exchange rates to the information contained in the U.S. Treasury's quarterly announcement of its debt funding packet. Although a reading of the financial press would suggest that the Treasury's quarterly debt refinancing announcements are an important type of news for financial market participants, market responses to this type of news have not been investigated. A second, related issue is whether such information substitutes for other types of information in foreign exchange markets.
The theoretical model underlying most of the existing "news" studies assumes that prices, including exchange rates, respond only to new information in an efficient market. The effect of this new information on prices is dependent on how the news changes financial market participants' expectations.
The affect of these expectations can vary over time since it is conditioned by market participants' recent experiences and the anticipated response of policymakers to economic news. This chapter examines the short-run responses of several major exchange rates to the news implicit in the index of leading economic indicators, the percentage gap in real GNP, and in the Treasury's quarterly announcements of new long-term debt issues, all for the period beginning in the third quarter of 1975 and ending in the third quarter of 1985. The time horizon is long enough to cover most of the recent period of floating exchange rates, as well as encompassing the period since the early 1980s, when the financial press became particularly concerned with the magnitude of the federal deficit and debt. 2