COVID-19 news announcements and the foreign exchange markets

Abstract

This thesis entails an empirical study investigating the intraday effects of corona-virus pandemic news announcements on FX market price diffusion components, return, and volatility. The study examines explicitly the major foreign exchange market response to the COVID-19 news release, including pandemic figures related to new confirmed cases, number of deaths, progress of vaccine development and administration, government intervention measures to mitigate virus spread, and the World Health Organization senior official speech about pandemic progress. In addition, this paper investigates the context-specific effects of macroeconomic news. In other words, it examines the effects of important macroeconomic news on currency price components prior to and during the pandemic period. The reason behind this is that the literature has reached a clear consensus about macroeconomic news’s significant effects over time. The findings of this research contribute to both the empirical finance literature and the financial industry because they include insights into the behavior of foreign exchange market participants and international finance portfolio managers when analyzing the effects of unprecedented health, social and economic crises. Previous literature shows that the stability of a country’s foreign trade and its external environments impacts the exchange rate return and volatility. COVID-19 made financial markets more volatile as the pandemic increased uncertainty in foreign trade and foreign investment and intensified financial market risks. To have a clear picture of the impact of the COVID-19 pandemic on FX markets, we incorporate all the essential COVID 19 announcements in this study. Our analysis documents that COVID-19 pandemic indicators and government response policies profoundly impact FX market volatility than a return. Also, regarding vaccine development news, there is strong evidence of FX market reaction to phase 3and emergency approval news related to COVID-19 vaccine development news. There is no evidence of market reaction to WHO official speeches about the COVID-19 pandemic in FX markets. The findings reveal that the FX market reacts to fewer macroeconomic news during the COVID-19 pandemic. However, the market reaction to US macroeconomic news is still state-dependent.