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Exchange rate volatility: Trader's beliefs and the role of news

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  • Roy Trivedi, Smita

Abstract

The study of financial market volatility has focused on the unexpected and expected components of news (Vortelinos, 2015; Omrane and Hafner, 2015). We incorporate the role of biases arising from the 'availability' of recent outcomes to the traders, in influencing trading decisions. The theory of heuristics (Tversky and Kahneman, 1974) is used to build on the theory of trader's biases which helps to understand the reasons behind market volatility. Empirically the model is tested with five minute data on USD/INR and time stamped news from the US and Indian markets. We find that volatility is likely to be in higher ranges with increase in trader's biases, corresponding to unexpected news component. GARCH analysis of returns of average bid-ask rates shows that unexpected news, expected news and bias corresponding to expected news lead to increased volatility.

Suggested Citation

  • Roy Trivedi, Smita, 2018. "Exchange rate volatility: Trader's beliefs and the role of news," MPRA Paper 89330, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89330
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate volatility; Unexpected and expected news; Trader's biases;
    All these keywords.

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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