RATIONALITY, BEHAVIOR AND SWITCHING
IDIOSYNCRACIES IN THE EURO-DOLLAR EXCHANGE RATE
Gabriella Cagliesi
University of Greenwich, UK
Massimo Tivegna
University of Teramo and LUISS Guido Carli, Rome Italy
ABSTRACT - This paper examines the determinants of the €-$ exchange rate, using the news approach to exchange
rate modeling and some behavioral finance categories in the interpretation of its dynamics. A twice-daily frequency
estimation was chosen, dividing the global trading day into an European Time Zone, ETZ (including also Asian
trading), and an American Time Zone, ATZ. A new typology of news variables, unscheduled news, was employed,
together with the traditional scheduled macroeconomic news. These former news, consisting of policy statements,
market events, market beliefs, terror-related events turned out to be the main determinants of €-$ movements.
Coefficient stability tests suggested to divide our 1999-2004 sample into three sub-periods roughly corresponding to the
three phases of recent Euro history. The main finding of our analysis is the rejection of the semi-strong EMH once we
move from the estimation over the entire sample to the three sub-periods. Here we find many lagged news variables to
be significant, contrary to what EMH posits. The distribution of lagged news across time zones (ETZ and ATZ) and
among the three sub-periods, indicates a substantial heterogeneity in the way news are decoded by market participants
in the two trading zones and that exchange rates in ATZ react almost exclusively to American news, indicating that this
zone influences the rest of the world but it is not affected by it. Scheduled news play a much bigger role in ATZ than in
ETZ, especially the creation of new jobs in the US (the Non-farm Payroll). Exchange rate dynamics in ETZ is
determined mostly by unscheduled news.
1
Introduction. The News Approach and Behavioral Finance..…………… 1
2
2.1
2.2
2.3
2.4
News and the €-$ Exchange Rate…………………………………………..4
News
Unscheduled News Selection
News in this Paper
News Count
3
3.1
3.2
3.3
A History of the Euro-Dollar……………………………….…….……..…9
First Period
Second Period
Third Period
4
4.1
4.2
4.2.1
4.2.2
4.2.3
4.3
The Econometrics of News Impact ……………………………………….19
Estimation Procedure
General Results
Areas, Regimes and Asymmetries
Lagged News: Geographic Factors
Lagged News and Corrective Actions: Reinforcing and Re-adjusting
Main Findings
5
Conclusions and Summary………………………………………………...26
FIGURES AND TABLES
BIBLIOGRAPHY
1) Introduction: the News Approach and Behavioral Finance
The time profile of the Euro-Dollar (€-$) exchange rate has a peculiar U-shaped form (see Fig 1.1).
This exchange rate is the younger one among the major pairs and its initial values have been the
object of an extensive negotiation among the participating countries 1 so it must be assumed it was
close to some form of "equilibrium": that rate was 1.17 on January 4, 1999. At its lowest this
exchange rate was at 0.82; in the last part of 2004 the rate was above 1.3000.
Values so far apart point to a persistence of misalignment vis à vis the Dollar for long periods. This
is not big news in today's currency market. The theory of exchange rate determination has
accordingly been looking, in recent times, for alternative explanations of the fluctuations of
exchange rates.
The dynamics of these variables was traditionally investigated in the seventies and eighties in terms
of equilibrium relationships between exchange rate and a group of macroeconomic variables, called
“fundamentals “ (economic activity variables, inflation, interest rates, monetary and financial
aggregates, etc). The appearance in the eighties of the paper by MEESE-ROGOFF(1983) casting
serious doubts on the forecasting performance of this class of models, generated a parallel
reconsideration of equilibrium schemes in favor - among other schemes - of news models. In this
latter approach it is the surprise in the fundamentals (the “news”) moving exchange rates.
The purpose of this paper is to investigate the determinants of the short-term fluctuations of the €-$
rate using two theoretical paradigms developed in recent years: the news approach to exchange rates
determination and the behavioral finance view of asset price formation. We attempt here an
informal synthesis - also with the help of history - of these two strands of theory to explain the wild
swings of the Euro exchange rate and its frequent “over-and-under-reactions” – in the terminology
of behavioral finance - to the arrival of new information, to what is typically called "news".
The news approach has grown out of the empirical counterpart of the main macro-financial theories
of exchange rate determination. In the first empirical paper of this literature, HOFFMANSCHLAGENHAUF(1985) estimated various news-form equations of the traditional models of
exchange rates.
After that, this literature generally followed the monetary scheme of
EDWARDS(1982, 1983)2.
The foreign exchange market is empirically very rich. Various data provider sample the international
financial market, tick by tick, and the main financial newswire services (e.g. Reuters, Bloomberg, DJ
Newswires, etc.) follow the market continuously and have reports of events affecting it with a time
stamp during the global trading day. They are the main source of news. This situation has made it
possible to various authors to analyze the market at various frequencies 3 and to estimate directly the
impact of a news-event on the exchange rate.
All the papers quoted so far use the publication of macroeconomic data at pre-determined dates. The
news variables are built as the difference between the announced values and those expected by
1
Belgium, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Greece joined later.
See also COPELAND(1984), BOMHOFF-KORTEWEG(1983), BRANSON(1983), MACDONALD(1983a and b),
FIORENTINI (1994), CIFARELLI(1986) and, more recently, NEWBY(2002).
3
At daily and monthly frequencies by DERAVI-GREGOROWICZ-HEGJI(1988), HARDOUVELIS(1988),
IRWIN(1989), HOGAN-MELVIN-ROBERTS(1991), DOUKAS-LIFELAND(1994), KARFAKIS-KIM(1995), HIN
HOCK LEE(1995), EDISON(1996). At infra-daily frequencies by ITO-ROLEY(1987, 1988), EDERINGTONLEE(1993,1995,1996), GOODHART-HALL-HENRY-PESARAN(1993), BAESTAENS-VAN DEN BERGH(1996),
ALMEIDA-GOODHART-PAYNE(1998) WANG-WRIGH(2002), ANDERSEN-BOLLERSLEV-DIEBOLDVEGA(2003), FAIR(2003), CHANG-TAYLOR(2003).
2
2
financial markets. The latter values, called “market consensus” are estimated by various research
organizations. One of them is Money Market Service, MMS, whose data are used in most of the
literature referred to above: they will be used in this paper too. This kind of news variables are called
"scheduled news".
This paper uses a relatively novel kind of news variables, called "unscheduled news" 4, consisting of
political news, policy statements, market news, interventions by Central Banks, unexpected monetary
policy decisions and other events, all occurring somewhat randomly overtime or, even though
expected to occur at a known time, having unknown content or an ex-ante unpredictable impact on
exchange rates5.
Section 2 in this paper is devoted to a description of the construction of news variables and how they
are used in this paper.
In sharp contrast with the abundance of the news literature, there are just a few papers on the impact
of political and market events on financial asset prices 6 and particularly on exchange rates7. In
recent times a group of writings has been concentrating on the role of noise in financial analysis and
trading (see, e.g., THALER (1993)).
This relatively new literature is called behavioral finance. Its unifying theme is the challenge to the
predictions of the Efficient Market Hypothesis (EMH). The EMH, formulated by FAMA(1970),
suggests that, at any given time, prices reflect all available information on any financial market.
The nature of information does not have to be limited to financial/economic news alone; indeed
information about political and social events, combined with how investors perceive such
information, whether true or rumored, will be reflected fully in financial asset price.
Since all market participants have the same information, no one will be able to out-perform anyone
else. Thus, according to EMH, prices are not predictable. Empirical findings, though, show that
consistent patterns are present8.
Studies in behavioral finance explain the presence of anomalies and price patterns that contrast with
the EMH by investigating the relevance and the effects of investors’ psychology on asset prices.
The field of behavioral finance thus combines methods originated in psychology with the more
traditional finance research methods. In doing so, it offers an alternative theoretical approach to the
study of financial markets. It is a relatively new field: it took place mostly from the late eighties,
taking impetus from “prospect theory”, formulated by Daniel Kaheman and Amos Tversky, first
published in 19749.
4
This definition is proposed by TIVEGNA(2002) and TIVEGNA-CHIOFI(2004).
The papers quoted in the previous footnote use this approach. The same line of analysis is used by FAIR(2003),
CHANG-TAYLOR(2003) and in FATUM-HUTCHISON(2002), whose approach is probably the closest to the one in
this paper. The most recent paper in this approach is by FRATSCHER(2004) in the Research Department of ECB.
6
See AGMON-FINDLAY (1992), DIAMONTE-LIEW-STEVENS (1996), ERB-HARVEY-VISKANTA (1986), for
the relationship between political risk and stock prices; ALLVINE-O'NEIL (1980), HOBBS-RILEY (1984), CUTLERPOTERBA-SUMMERS(1993) f or the impact of US presidential elections and other political events on the US stock
market.
5
7
TIVEGNA(1996a,b), TIVEGNA-CHIOFI(2004), FORNARI, MONTICELLI, PERICOLI, TIVEGNA(1999) and
KEIL(1993) are an exception.
8
For a survey of some anomalies see THALER (1994). In the financial world, there are investors that have consistently
out-performed the market, some portfolio managers have a better track record than others, some have adopted strategies
focused on undervalued stock and made millions, setting an example for others to follow.
9
KAHEMAN-TVERSKY(1974). Prospect theory offered an alternative to the expected utility paradigm that dominated
research in finance and economics, based on the experimental evidence that human behavior under uncertainty is easily
3
More general, insights from many other psychological theories have been applied to understand
phenomena in financial market. Extensive psychological research has documented that people tend
to be overconfident in their judgments; they value the comfort of imitating each other (herd
behavior), they may be far more frightened of losses than inspired by potential gains (the loss
function would not be symmetric), they have problems of self-control.
If the calculating, emotionless, unboundedly rational Homo Oeconomicus displays human
limitations and complications, markets can show behavior conflicting with the EMH theory. In
particular, as pointed out by SHILLER(2000), in foreseeing the bursting of America’s share-price
bubble, people can pay for shares much more than any other rational investor would, enabling
returns to have patterns that differ from the pure «random walk» path.
An important reason for success of the news approach is the possibility of integrating the
explanation of foreign exchange returns within the standard paradigm of asset price formation, the
EMH. According to it, contemporaneous information - on fundamentals and news on fundamentals
– should be sufficient to determine unequivocally the returns. In this paper we will demonstrate
empirically (in Section 4) that forex returns determination needs much more than contemporaneous
macroeconomic news, as we show that also lagged news of all kinds contain significant information
to explain returns overtime.
In this paper we estimate several news equations of the type specified below:
r
m
n
s=1
j =1
i=1
St +1 − St = α + ∑ϑsYs,t +1 + ∑β j [Z j,t +1 − Et (Z j,t +1 )] + ∑γ iUi,t +1 + ε t +1
(1.1)
This equation shows the relationship between the variation of the exchange rate, S, in t+1 and a set
of determinants: "s" fundamental determinants Yt+1, the difference between "m" scheduled news on
the main macroeconomic indicators Zt+1 and their expected values, "n" unscheduled news Ut+1. α, θ,
β and γ are parameters to be estimated and εt+1 is the normally distributed error with zero mean and
constant variance.
The time index 10 in (1.1) refers to a twice-daily frequency, observing the €-$ exchange rates at
two different times in the 24-hour Global Trading Day (GTD) 11 at 4PM EST (10PM, CET) and at
8:15AM EST (2:15PM, CET) when the European Central bank (ECB) evaluates the Euro exchange
rate versus the major world currencies. We thus estimate in the empirical section of this paper two
different exchange rate equations: one of them is referred to the European Time Zone (ETZ ) going
from the closing of the US markets the previous calendar day at 4PM EST (10PM, CET) to
8:15AM (2:15PM, CET); the other equation is referred to the American Time Zone (ATZ) going
from 8:15AM to 4:PM, EST.
Both scheduled and unscheduled news occur during ETZ or ATZ. Scheduled news in ETZ are
typically in the wires between 7 and 10AM, CET. ATZ news are mostly concentrated at 8:30AM,
influenced by the context that accompanies the decision problems. Part of this framing is generated by the people
themselves, as when they adopt some mental accounting of their financial circumstances, such as “representative
heuristics” (when they infer the probability of a model from data – generally the most recent data - rather than using
the appropriate statistical probability) or conservatism (when they persevere in their past beliefs long after they should
have abandoned them).
10
The above formulation is time-invariant and could have been written with reference to time t and not t+1.
11
It goes, in our analysis from the closing of US financial markets on the East Coast at 4PM EST (Eastern Standard
Time, equivalent to 10PM, Central European Time, CET) in day t to the same time twenty four hours later.
4
EST 12, but something is also released later. Unscheduled news can happen anytime during ETZ and
ATZ but typically long before the time the corresponding exchange rate is sampled. Fundamentals
have a precise timing within the above time zones. A discussion on the scheduled and unscheduled
news used in this paper is in Section 2.
This rather unusual timing convention - empirically quite robust - has the main advantage of
allowing a sharper measurement of the news impact over the €-$ rate at a relatively low frequency.
Our impact is measured with respect to the exchange rate at the end of our two time zones (ETZ and
ATZ). With respect to a larger set of scheduled news, which were found to be significant at higher
frequency in the papers recalled in footnotes 4 and 6, just a few show a significant effect at the end
of our time period in the equations estimated below. Unscheduled news, on the other hand, are
much more significant and exert a powerful influence even on unconditional returns 13 .
According to the news approach and the EMH, all that is needed to explain an exchange rate return
is information on α, θ, β. We will show in this paper that all over and under reactions, all forms of
persistence in overshooting values of €-$ all debated anomalies in forex dynamics depend on
unscheduled news - to estimate γ - and on lags in all news typologies (scheduled and unscheduled).
We thus offer in one shot (a) an important integration to the news approach (you need unscheduled
news to understand exchange rate swings, the €-$ here), (b) a rejection of EMH price formation in
the foreign exchange market. This is done in the econometric Section 4.
A complete assessment of the importance of unscheduled news needs historical perspective.
Important episodes of overshooting and undershooting frequently need a full understanding of the
market sentiment prevailing at the time they occur. Polarization 14 – frequently generated by all
types of news – is an effect and a cause of wild swings in exchange rates. In order to understand it,
econometrics is not enough. A detailed market chronicle is needed to spot the formation and
changes of market sentiment. This is done in Section 3.
2.) News and the €-$ Exchange Rate
2.1) News
The gathering and analysis of the latest piece of available information (on the publication of the
main macroeconomic indicators, on policy disclosures, on monetary and fiscal policy news, on
overall economic outlook news, etc.) is the core of the daily activity in currency trading. Such a
keen attention to the latest piece of available information stands in sharp contrast to standard
theories of exchange rate determination that concentrate just on the relationship between prices and
fundamental macroeconomic and financial variables.
As to these latter theories, the explanation of the short term dynamics of currency prices is not
inconsistent with the idea that fundamentals matter but it concentrates not on the relationship
between their actual values and exchange rates but rather on the surprise effect (the news) made of
differences between their actual values, released by the statistical authorities, and the values
expected by financial markets (collected by specialized organizations). This difference can be
12
Whence the ECB "fixing" of the Euro rate at 8:15AM , EST and our decision to follow suit.
See Section 4.
14
By polarization we mean here the tendency of the exchange rate to move monotonically for an extended period of
time irrespective of a contradicting coeval flow of news and in contrast with fundamentals. We have several episodes
of polarization in our sample. This definition is similar to that of a “speculative bubble”. See SARNOTAYLOR(2002), Section 2.4. Polarization puts a stronger emphasis on a continuously biased interpretation of news
with respect to comparable phases of the market.
13
5
algebraically positive or negative - different from Euro-positive or negative - and has various sizes.
They are the "scheduled news", so called because they are published according to a calendar known
beforehand.
Scheduled news thus regards macroeconomic announcements by Governments or Central Banks.
Amongst the two areas of our exchange rate, the Euro-Dollar, during our sample period, 1999–
2004, both United States and Germany have had a calendar of statistical releases of monthly
economic indicators made known well ahead, typically in the early hours of their respective trading
zones, before the opening of stock markets, with some exceptions, though.
As mentioned in the introduction, the news literature has been using for a long time only scheduled
news. More recently, some research results have appeared where aperiodic events - the
"unscheduled news" - have also been introduced into the analysis in various forms 15. This paper
uses this type of news extensively as many behavioral features of the foreign exchange markets
originate from this class of events.
In principle, unscheduled news consists of an economic, an institutional or a policy event, a
declaration or a disclosure, which can be either totally unexpected or - even though expected to
occur - has an unknown timing, or an unknown content or both. This news typology, therefore,
implies a process of expectation formation very different from that of scheduled news and most
likely to be variable overtime.
2.2) Unscheduled News Selection
In order to isolate regularly market-moving or signal-producing unscheduled news from the vast
mass of information flooding trading rooms, we first need to assemble a class of events likely to
affect the foreign exchange market, we then have to separate this group into two sub-groups, those
having a likely appreciating effect on the exchange rate (the €-$, in our case) from those having a
depreciating effect.
Therefore, in our type of analysis we need to fix the sign of the impact of an unexpected event a
priori. All that requires some statistical analysis and some form of case-by-case decisions. The
data bank of events affecting the foreign exchange market, from which a selection of unscheduled
news was derived, is being continuously updated and the process of news selection has been going
on for a few years, so it has improved overtime 16.
15
See footnotes 4, 5.
A first version of the data bank of events we use, called Newsmetrics, contains news between 1994 and 1997. The
description of this data bank is in TIVEGNA-CHIOFI(2004). The second version goes from 1998 to present and is
much more detailed. Originally, the authors of the above book had a long series of interviews with various currency
traders to determine the effects of the markets’ most frequent news. This activity was accompanied by the reading of
the foreign exchange sections of the main international business newspapers. After an initial selection, an extensive
statistical analysis was carried out. The reduction from a large number of events to a smaller set of statistically more
significant and theoretically more meaningful ones (on the basis of economics and traders' experience) was based on
the following steps: 1) all the events potentially connected with the forex market were gathered together; 2) those events
most likely to produce a positive effect (exchange rate appreciation) were separated from those with an opposite sign; 3)
binary variables (0, 1) were built for both kind of news; 4) exchange rate equations having all significant scheduled
news and a so-called "structural " parts (with interest rates, stock market variables - if relevant - various lagged
variables, etc) were estimated and the residuals were analyzed in search of small and large outliers; 5) an initial
matching of possible news under 2 above and outliers was done and a first set of unscheduled news were tentatively
established; 6) using the variables thus constructed, various regression trials on the exchange rates were performed to
build an initial taxonomy of news, so that the calculation process determined the sign, the intensity and the significance
of each category of events; 7) an analysis of the coefficients and the residuals of the regressions under 6 was performed
in order to identify individual events that had a weaker effect on the day’s exchange rate variation and therefore of a
more uncertain or even opposite sign; 8) based on 7 we modified the vectors of events, with some shifts between news
16
6
The experience of news selection, suggests that a combination of statistical testing and qualitative
judgment is necessary mainly because the same event can have different impacts in different
moments (or no impact at all, for no clear reason), according to time-varying market sentiment. The
analysis of this paper confirms that this is true as we could split our sample of Euro existence into
three periods where scheduled and unscheduled news had widely different impacts in each one of
them.
2.3) News in this paper
As written in the introduction, the empirical analysis in this paper 17 , as well as the procedure
leading to the detection of unscheduled news, is organized over the division of the twenty-four hour
global trading day into two parts: the European Time Zone (ETZ) going from the US East Coast
financial markets closing, at 4PM EST (10PM, CET) the previous day, to 2:15PM, CET (8:15AM,
EST), and the American Time Zone (ATZ), from 8:15AM, EST, to US closing the same day at
4PM EST.
Each unscheduled news is assigned to a time zone18. The impact of the news is assessed on the
variation of the €-$ rate from the end of the time zone where it occurred to the end of the previous
time zone.
Both scheduled and unscheduled news must be assigned therefore to the correct time zone.
Beginning with the unscheduled news in ETZ, we have the following four typologies:
DEU: statements relevant for €-$ in ETZ: policy statements by ECB's President Wim Duisenberg
(until November 2003) and other Board Members, most notably Trichet (President from
November 2003), Issing, Welteke (also Bundesbank President, from September 1999 to April
2004). In ETZ we also have - for instance - market-moving statements by Germany's Chancellor
Shroeder, Finance Minister Eichel, Luxembourg's Junker, France's Strauss-Khan, Fabius, and
some US Policy Makers (e.g. Greenspan and Snow) making statements in ETZ. What matters is
not the nationality of the speaker but the time frame 19 .
IECBE: ECB forex intervention in ETZ, occurring only at the end of 2000.
MEU: a miscellaneous of political, monetary and fiscal policy and market events determining
expectations on the exchange rate and on the future direction of interest rates 20 .
WEU: a miscellaneous of events, starting in April 2002, associated with various weakening and
strengthening phases of €-$ in response to events being different from those under MEU above.
They are connected with extreme market positioning, volatile or polarized sentiment towards the
US Dollar, Iraq and terror-related news, both before and after the short military phase21.
vectors, and then repeated steps 3 to 7 until all the controversial sign assignments were eliminated and a cleaner and
final taxonomy of news obtained.
17
And in all previous ones. See TIVEGNA(2002), TIVEGNA(2003), TIVEGNA-CHIOFI(2004).
Their occurrence does not have a precise time stamp. Only scheduled news do. The unscheduled news is referred to
one of the two time zones. Particular attention has been used (also with the use of Reuters news-flash archive, where a
time stamp is assigned to the report describing the event) to assign a certain news items to the correct time zone.
19
See footnotes 34, 35, 39, 42, 49, 77 in Section 3.
20
See footnotes 36, 40, 45, 48, 52, 53, 59, 73 in Section 3.
21
See footnotes 60, 62, 68, 69, 70, 71, 72, 74, 75, 76 in Section 3.
18
7
In ATZ we have a corresponding set of unscheduled news, plus one for September 11:
DUS: statements relevant for €-$ in ATZ: policy and economic outlook statements by the Governor
of the Federal Reserve System, Alan Greenspan, and by some other influential Board members,
e.g. Bernanke, Ferguson, Mc Donough, Meyer. It is worth remembering that, contrary to Euro
area practices, the US Treasury is in charge of exchange rate policy. Therefore, statements by
Rubin, Summers, O'Neill and Snow were big market movers, especially from the beginning of
the Republican Administration, at the end of 2000, with continuous rumors over its commitment
to a "strong Dollar policy". Also European policy makers speaking in the European afternoon are
included here 22 .
MUS: same as MEU 23 .
TWIN: just one observation for the shock of 9/11
WUS: same as WEU 24.
The occurrence of qualitative news is represented as follows:
+1
when a Euro-positive news occurs
0
no news
-1
when a Euro-negative news occurs.
The scheduled news considered in this paper are just a small part of all those available 25 and
analyzed in a process of news reduction carried out in the empirical analysis underlying this paper26.
They are, for ETZ and ATZ, respectively:
GIFO: actual value of the monthly German business confidence index, computed by IFO of
Munich, less a consensus value estimated by Standard and Poor's Money Market Services and
other sources.
UGDP: actual growth rates of seasonally adjusted real US Gross Domestic Product, estimated
with monthly revisions by the US Department of Commerce, less a consensus value proposed by
Standard and Poor's Money Market Services and other sources.
UNAPM: actual value of the monthly survey index of US business conditions computed by the
Institute of Supply Management (ISM, formerly National Association of Purchasing Managers,
NAPM), less a consensus value estimated by Standard and Poor's Money Market Services and
other sources.
UOC: actual monthly value of US new non-farm employment (payroll), seasonally adjusted,
computed by the US Bureau of Labor Statistics, less a consensus value estimated by Standard
and Poor's Money Market Services and other sources.
22
23
See footnotes 43, 44, 54, 61, 63, 68, 69, 70 in Section 3.
See footnotes 36, 40, 45, 47, 51, 53, 55, 56, 57, 58, 73 in Section 3.
24
See footnotes 61, 62, 65, 66, 67, 68, 72, 74, 76 in Section 3.
See footnote 78 in Section 4.
26
This reduction was carried out testing for significance of the news variables mentioned in the previous footnote
(separately and jointly). The reduced equation is discussed in the fourth paragraph.
25
8
2.4) News Count
We are trying to explain in this paper twice-daily €-$ returns over 1375 days between January 4,
1999 and April 9, 2004. It is of some interest to analyze the distribution of the different types of
news in this period and a first assessment of their potential influence over the movements of our
exchange rate. We assembled three tables. In Table 2.1, we show - in ETZ and ATZ - the number of
observations for each of the twelve news-variable described above - divided between Euro-positive
and Euro-negative - and their percentage distribution in the sample.
In Tables 2.2 and 2.3 we compute in percentage terms, for ETZ and ATZ, how many times the
absolute values of €-$ news-concurrent returns are higher than their corresponding means and
standard errors (SE) 27. Here, too, we separate Euro positive and Euro-negative news. A comparison
is also made with the percentage of the absolute value of €-$ returns higher than their respective
means and SE.
We observe from Tab. 2.1, line 1, that the number of unscheduled news items is higher in ETZ than
in ATZ . The overall distribution of the three types of unscheduled news (Policy Statements, Market
Events and Dollar Events) is comparable in the two time zones (lines 8, 14, 20). The percentage of
Euro-positive versus Euro negative unscheduled news is slightly less balanced in the two areas
(lines 4 and 6) and among the three types of news (lines 10, 12, 16, 18, 22, 24) but the broad picture
is consistent with the €-$ movements between the first and last observations in our sample, not
being too far apart (1.1827 and 1.2096). The overall percentage of Euro-positive unscheduled news
is in fact higher than the Euro-negative's (lines 4 and 6).
Let us speculate a little more on why the number of unscheduled news is much higher in ETZ than
in ATZ. This can be due to essentially three reasons. The first is that ETZ includes also trading in
Japan and in the Asian area, typically in thin markets: this can cause sharp movements of the
exchange rate not attributable to any major news in the fundamentals: unscheduled news are
therefore more numerous in ETZ. A second reason is the concentration in the European morning of
the statement and disclosure activity by Euroland Policy Makers as opposed, in ATZ, with a tighter
grip by the Fed on the talking activity of its Board Members and the substantial neglect by the US
of the external value of the Dollar. This explanation is also reinforced by the lack of a common
view by Euroland Policy makers on the determinants and consequences of the movements of the
Euro, which certainly kept their speech-writers busier than otherwise. A third reason is the
tendency of the €-$ to move in ATZ in response to scheduled news and to tangible market factors the stock market in primis - and the concentration in the early part of ATZ of London and New
York traders, generally more professional in market analysis. This last point is entirely confirmed if
we observe that adding statistically significant scheduled and unscheduled news in ATZ we total
461 events, one news less than unscheduled news in ETZ.
As to scheduled news 28, their number is of course much lower in ETZ than in ATZ (lines 25, 31,
37 in Table 2.1) - since we consider one in ETZ and three in ATZ - and the percentage weight of
Euro-positive and Euro-negative news is balanced in ETZ (lines 28, 30), slightly less so in ATZ
(lines 28, 30, 34, 36, 40, 42) 29 .
27
Meaning how many times the delta log of €-$, occurring at the same time of an unscheduled (upper part of the table)
and scheduled news (lower part of the table), in ETZ (Tab. 2.2) or ATZ (Tab. 2.3) is - in percentage terms - higher than
the corresponding mean (and the corresponding mean plus one standard error).
28
Here again, we want to stress that we mean statistically significant scheduled news.
29
We observe that the number of scheduled news, in our sample, should be 64 for the news being released in the first
part of the month (US payrolls, UOC, and ISM; formerly NAPM, UNAPM) and 63 for the others (US GDP, UGDP,
and the German IFO, GIFO). The number of two of these news is slightly lower (lines 25, 37) as there are cases where
the actual and expected data are equal.
9
Tables 2.2 and 2.3 offer some preliminary indications - to be confirmed econometrically later - of
the €-$-moving potential of our scheduled and unscheduled news. They have four main features.
Firstly, the percentage of returns higher than the mean and SE (happening in conjunction with
news) is consistently bigger- with two exceptions (lines 13, 17, 14, 18) - in ETZ than in ATZ. That
maybe occurs because of the same circumstances outlined above 30. Secondly, in the aggregate, the
amount of returns higher than the mean and the SE is consistently larger - and sometimes much
larger - for unscheduled than scheduled news in both trading areas. This is confirmed by our
econometric estimates here and elsewhere 31. Thirdly and somewhat strangely, the percentage of
Euro- negative returns higher than the mean and the SE is bigger in ETZ than ATZ and vice-versa
(with one small exception) for Euro-positive news. This result is in contrast with what has been
maintained for sometime by forex market participants: that trading is $-friendly in ATZ because a
spontaneous demand for dollars for commercial transactions and portfolio management is a
standard feature in the US morning.
The fourth result is an aggregate one: the proportion of returns higher than the mean and SE when
concurrent with scheduled and unscheduled news items - in the aggregate, for Euro-positives and
for Euro-negatives - is much higher than the proportion of positive and negative returns in the 1375
observations. This indicates that the occurrence of a news produces a significantly higher return.
Compare the upper part of Table 2.2 and Table 2.3 with the lower part of Table 2.2.
3.) A History of the €-$ in 1999 - 2004
The purpose of going through a detailed history of the €-$ is twofold. To offer a reasonably broad
perspective on the nature of unscheduled news – in the footnotes of this section – as this crucially
important market-moving news type (at least in our experience) is the most elusive to pinpoint. A
second aim, is to produce a dynamic picture of how unscheduled news interacts with the scheduled
ones and what is their scope in shaping expectations and determining market sentiment.
We describe the €-$ history with reference to the three sub-periods we were able to separate in the
econometric Section 4. They correspond to the depreciating Euro, to the fluctuating Euro and to the
Euro rally.
3.1) First Period – from January 4, 1999 to December 15, 2000
The first day of trading of the Euro is January 4, 1999. The first quote of ECB at 2PM is 1.1780 (a
visual reference can be made to Fig. 4.1). After this date, the Euro collapsed almost monotonically
until the first week in March (reaching 1.0812 at the end of US trading on March 4th) mostly on the
following two arguments, both Euro-negative: (1) the initial malfunctioning of the ECB payments
system, Target; (2) the “policy shots” between the independent ECB (with a “wait and see” attitude
on interest rates at the start of the EMU) and Germany’s Finance Minister Oskar Lafontaine, who
wants monetary policy to support the faltering German growth32. This first period ends with the
30
News related to heterogeneity of trading patterns in ETZ , concentration of policy statements in the European
morning and the difficulty of finding a common position on the exchange rate in Euroland maybe cause sharper jumps
of the €-$.
31
See TIVEGNA(2002) and TIVEGNA-CHIOFI(2004).
32
The following Financial Times (FT) news stories highlight all points made in the text. All the news described in the footnotes
contain the news code (see Table 4.1) and the percentage returns of €-$ in the relevant time zones.
"Tension between the German government and the European Central Bank over economic policy escalated today when
Oskar Lafontaine, the German finance minister, said it would be "completely wrong" for governments to cut spending
in the current economic climate. The comment highlights the growing impasse in economic policy in the 11-nation
euro-zone, as finance ministers and the ECB blame each other for the slowdown" (FT, 2/18/999), DEU -0.7, DUS 10
resignation of Lafontaine in late afternoon on March 11th, causing a sharp spike up of the Euro, 141
BP during US trading.
Following the Lafontaine story, a good part of Euro-Dollar fluctuations on a downward trend in this
period is caused by the Euro-negative war in Yugoslavia-Kosovo (from the end of March to the
approval of the international peace plan for Kosovo by the UN on June 10). Another important
factor in Euro weakness is the beginning of “policy statements confusion” by European Policy
Makers on the appropriate level of the Euro, from the end of May through to the end of the
Summer33.
This noisy and confusing debate grows in intensity overtime and it is indicated by most market
reports as the main cause for Euro weakness, eventually leading to a deep distrust of ECB monetary
policy and of Wim Duisenberg, personally, by foreign exchange markets.
The balance of 1999 saw the Euro fluctuating above parity up to a maximum of 1.10 in midOctober. After the minima of early July, the Euro had an upward bounce from parity partly induced
by $-negative emerging markets jitters, “cyclical” concerns over the financing of the US trade
deficit and positive news on French and German growth. Then the Euro dropped again by ten-
0.34.
33
"A flurry of comments by German officials further depressed the euro in thin trading ahead of the outcome of
the G7 meeting. While warning against a policy of neglect, Hans Tietmeyer, president of the Bundesbank, said the
present level of the euro against the dollar was appropriate. His remarks were echoed by Hans Eichel, Germany's
new finance minister, who said the euro's decline was a process of "normalisation" which was not a matter of concern"
(FT, 4/26/1999), DEU -0.01.
"The euro staged a modest recovery after a string of European monetary officials moved to counter the market's
perception that they were following a policy of benign neglect" (FT, 4/27/1999), DEU +0.43.
"Market players bid the dollar lower against the euro, increasing dollar sales after European Central Bank President
Wim Duisenberg added his voice to the growing chorus of concern for a weak euro" (FT, 4/27/1999), DUS +0.35.
"The muted response of European officials to the euro's recent slide caused many analysts to question whether the
ECB's pain threshold had shifted. They said that today's statements from monetary officials were in stark contrast to the
spirited defence put up when the euro dipped to $1.056 last month" (FT, 5/27/1999), DUS -0.35.
"Romano Prodi, president-designate of the European Commission, triggered a drop in the euro's value after suggesting
that Italy could drop out of the euro-zone because of a lack of industrial competitiveness" (FT, 6/21/1999), DEU -0.52.
"The euro made a bid to steal sterling's limelight later in the London session as traders saw comments from Hans
Eichel, the German finance minister, as an excuse to push the currency further towards parity with the dollar. Mr Eichel
said that there was no problem with a weak euro, which would be good for euro-zone exports. His remarks were the
latest in a series of comments from European policy-makers which seem to imply that intervention is unlikely unless the
euro seriously undershoots " (FT, 7/8/1999), DEU -0.41.
"After sinking rapidly in early European trading after bearish comments from Horst Siebert, one of the "Wise Men"
who advise the German government on economic policy, a retraction of the remarks was enough to undo the damage
against the dollar. Later in the day, the euro staged a small revival, pushing above $1.02 against the dollar" (FT,
7/14/1999), DEU -0.06.
"While the euro was stronger in US trading, it had been undermined earlier in Europe by verbal indiscipline among
European officials. Most damaging of the recent comments came from Eugenio Domingo Solans, a member of the
ECB's executive board, who said Europe's monetary authorities would not raise interest rates to defend the euro. In
contrast to the hawkish tone taken last week by Wim Duisenberg, the president of the ECB, Mr Solans said "neither the
evolution of money in circulation nor inflation forecasts lead to the conclusion that interest rates needed to be changed"
(FT, 7/19/1999), DEU -0.51.
"Ernst Welteke, the Bundesbank's new president, caused confusion in foreign exchange Markets by first expressing
support for the euro's current exchange rate against the dollar and then withdrawing his remarks" (FT, 9/7/1999), DEU
-.48.
11
figures (1.000 BP) out of policy-confusing statements on interest rate policy and intervention in the
forex markets by ECB34.
2000
A third and this time successful attempt to break parity began after new year’s eve 2000. The initial
drop of the Euro in January is not triggered by any specific factor but rather by the sheer attempt to
break parity. Some reversal and subsequent stabilization below parity occurs after an interest rate
increase by ECB on February 3 and expectations of further rises (before the one occurring on March
16). The Euro then weakens again from the end of March out of a mix of factors: an increase in
interest rates in the US (March 22nd) and in Switzerland (March 23rd), political crisis in Italy (Prime
Minister D’Alema's resignation) and Austria (the rise to the vicinity of power of the xenophobic
leader Heider and domestic and EU reactions to it)35, disenchantment over deregulation and
structural reforms in Europe. The weakening reaches its climax on the first adverse reaction by
financial markets to an interest rate hike by ECB on April 27 36 caused by disappointment for an
excessively single-handed interpretation of monetary policy in the Euroland area (more inflation
34
Here is a sample of statements:
"European financial officials weren't mincing words in touting the case for tighter monetary policy in the euro-zone.
But their support for higher interest rates did little to boost the euro, which declined throughout the day against the
dollar and fell to its lowest level in a month against the yen. European Central Bank President Wim Duisenberg told
members of the European Parliament that raising interest rates was more akin to a driver lifting his foot from the
accelerator than putting on the brakes "(FT, 10/26/1999), DEU -0.42, DUS -0.38.
"Otmar Issing, the chief economist at the Bundesbank, rode to the defence of the euro, helping to reverse a slump
against the dollar. Mr Issing gave his clearest signal yet that the European Central Bank was likely to raise interest rates
in the near future when he said that monetary growth was moving further above the ECB's reference value and that the
reasons for the "precautionary" cut in interest rates in April had now disappeared" (FT, 10/29/1999), DUS +0.96.
"The euro was undermined in trading by two European Central Bank officials who indicated the bank wasn't likely to
intervene on behalf of the single currency. Executive Board Member Eugenio Domingo Solans said the central bank has
"no intention of intervening" to prevent the euro from falling to dollar parity, while Otmar Issing, the European Central
Bank's influential chief economist, said the importance of foreign-exchange rates has "substantially declined." The
statements knocked the wind out of the euro as it began recovering from losses Wednesday, when the euro fell to a
record low against the yen and threatened to do the same against the Dollar" (FT, 11/25/1999), DUS -0.04.
"A further fall in the euro's external exchange rate will not by itself provoke the European Central Bank into raising
interest rates, Wim Duisenberg, the ECB president, said today. Speaking after a meeting of the ECB's governing council
at which it left its benchmark interest rate at 3 per cent, Mr Duisenberg said the euro had potential to rise in value and
he would be concerned if that did not eventually happen: "But these things always take time." The euro fell almost to
parity with the dollar in Europe today only hours after Mr Duisenberg's remarks, dropping to a lifetime low of $1.0010
before pulling back slightly" (FT, 12/02/1999), DEU -0.27, DUS -0.38.
"The euro fell below $1.02 against the dollar on Thursday after unhelpful comments from Otmar Issing, the chief
economist of the European Central Bank. The fall, in the middle of the European session, also dragged the dollar lower
against the yen. The euro dropped after the usually emollient Mr Issing tweaked the tail of currency traders by
appearing to gloat that speculators had "burnt their fingers" in the attempt to push the euro below parity" (FT,
12/09/1999), DEU -1.03.
35
"The euro fell to records against the dollar and pound, undermined by political instability in Italy and remarks by an
important Austrian politician. Italian Prime Minister Massimo D'Alema resigned Wednesday following several days of
political turmoil triggered by a victory of center-right coalition parties in local elections Sunday. Conservative
politicians, led by a former prime minister, Silvio Berlusconi, are appealing to Italian President Carlo Azeglio Ciampi
for early elections. Meanwhile, Joerg Haider, former leader of Austria's Freedom Party, said in an interview published
Wednesday that his country should consider leaving the EU in response to diplomatic sanctions imposed on Austria by
members of the 15-nation union, after Mr. Haider's party became part of a coalition government" (FT, 4/19/2000), MEU
-0.13, MUS -0.55.
36
"The European Central Bank raised interest rates Thursday by 0.25 percentage points, its fourth successive increase
since November. The rise failed to stop the euro hitting a hat-trick of record lows against the dollar, the yen and
sterling. The euro plunged to below $0.91 just minutes after the ECB decision and finished London trading only
fractionally higher at $0.912. Its slide resumed in New York where in late afternoon it was trading at around $0.9098.
"Confidence in the euro has been so badly bruised over the past days that it would have been naive to expect a 25 basis
point rise to do much good," said Mark Cliffe, chief economist at ING-Barings" (FT, 04/27/2000), MEU -0.73, MUS 0.64.
12
leading to more tightening without any interest for stagflation risks). After some fluctuations around
0.90 in the first week of May, Euroland leaders succeed in supporting the Euro through verbal
intervention; afterwards, fears of a US slowdown steps in and the Euro breathes a little until June 8,
when ECB surprises markets with a larger than expected 0.50 rate increase and causes the second
perverse drop of the Euro37, followed by further drops in July and August. The European currency
fluctuates between 0.93 and 0.96 for the balance of June.
The descent resumes in July on doubts over the Danish referendum, for the adoption of the Euro,
and continues in September with Euro-devastating statements by Schroeder, not worried about a
weaker currency (September 5-6 38 ). This last policy disclosure, in particular, leaves the market
with the firm belief that Euroland Policy Makers want a weaker Euro which thus collapses towards
0.80, forcing a joint intervention by ECB and other major European and international Central Banks
to support it on September 22, 2000. But the depreciation resumes immediately after the
intervention. The ECB raises interest rates on October 5 but the Euro does not stop depreciating39,
partly because of a confusing statement by Duisenberg, ruling out any more interventions by ECB40.
The subsequent press uproar41 on the adequacy of Mr. Duisenberg at the helm of ECB does not help
the Euro.
Near the end of November – and near the Euro historic minimum – a sudden large order by a
Middle East bank sparks a recovery of the Euro, nourished by fears of a softer US economy and of
a lesser commitment to Dollar strength by the Republican Administration. The appointment of Paul
37
"The European Central Bank surprised financial markets on Thursday when it raised interest rates by a larger than
expected 0.5 percentage points. Citing a risk that inflation would breach the ECB's 2 per cent target this year and in
2001, the bank raised its main lending rate to 4.25 per cent from 3.75 per cent. It was the fifth rise since November,
when the rate was 2.5 per cent. The euro had a bumpy ride on the foreign exchange markets on Thursday as the market
struggled to decide whether a surprisingly aggressive rate rise was good or bad for the currency. The euro initially
bolted almost a cent higher after the European Central Bank lifted the refinancing rate by 50 basis points to 4.25 per
cent. With rates playing a central role in recent currency movements, many market observers expected to move to be
sustained. In fact the euro quickly tumbled lower, giving up all of its post rate rise gains and more" (FT, 06/08/2000),
MEU +0.42, MUS -1.01.
38
"When Gerhard Schroeder, the German chancellor, suggested that policymakers should be satisfied with the
weakness of the euro as a way of boosting exports, there was little immediate response in the market. But as traders
have digested the comments sentiment has soured further on the euro. Market participants are concerned by the clash
between MrSchroeder's nonchalance and the evident eagerness of euro-zone central bankers to push the currency
higher" (FT, 9/05/2000), DEU -1.16.
"The euro tumbled to lifetime lows against the dollar and yen on Wednesday after a German government spokeswoman
insisted that Chancellor Gerhard Schroder was not concerned about the euro's weakness on foreign exchange markets.
The fall came despite positive economic data from Germany" (FT, 9/06/2000), DEU -0.87, DUS -1.16.
39
"The European Central Bank raised euro-zone interest rates by 0.25 percentage points to 4.75 per cent on Thursday,
with economists sharply divided on the wisdom of its decision. The markets reacted with equal confusion. The euro
soared half a cent within less than an hour of the news to $0.878, before falling again within two hours to $0.872, just
below the pre-announcement level of $0.873" (FT, 10/05/2000), MEU +0.38, MUS -0.94.
40
"The euro fell close to its all-time low on Monday after comments by Wim Duisenberg, the president of the European
Central Bank, exposed disarray in Europe's policy towards the ailing currency. In an interview with a British
newspaper, Mr Duisenberg dampened hopes of imminent intervention to support the euro" (FT, 10/16/2000), DEU 0.25.
41
"Wim Duisenberg was engulfed in a storm of criticism on Tuesday over his performance as president of the European
Central Bank, but offered no sign that he was considering resignation" (FT, 10/17/2000), DEU -0.10.
"Wim Duisenberg, the beleaguered president of the European Central Bank, on Thursday acknowledged that he must
make no more market-sensitive remarks about the euro. He received strong support from Jean-Claude Trichet, the Bank
of France governor and Mr Duisenberg's designated successor, who described the ECB's 17- member council as "a
united team, a team which is warmly united behind our president, Wim Duisenberg". But German officials said Hans
Eichel, German finance minister, and his French counterpart, Laurent Fabius, had publicly stated their support for the
ECB, but not for Mr Duisenberg" (FT, 10/19/2000), DEU +0.23, DUS +0.22.
13
O’Neill (an Alcoa CEO) as Treasury Secretary on December 20 confirms this belief and causes a
further Euro rally – on thin liquidity - towards year-end 2000.
3.2) Second Period – from December 18, 2000 to July 19, 2002
The new year 2001 begins with an unexpected intra-meeting cut of the US Federal Funds rates by
half a percentage point, on January 3, 2001. The decision is taken:
“in light of further weakening of sales and production and in the context of lower consumer
confidence, tight conditions in some segments of financial markets and high energy prices, sapping
households and business purchasing power” (from Fed end-of-meeting statement).
This is a period of stabilization of the €-$, corresponding to a phase of slow-down of the US
economy and a peak (and subsequent droop) in the stock market. This new situation of the US
economy is effectively underlined by the very rare intra-meeting cut by the Fed. 9/11 and its
aftermath is super-imposed on this slow-down and on a slumping Wall Street. The €-$ depreciation
is also stopped by rising concerns on the “strong-Dollar” commitment by the US Administration,
which begins to materialize in this sub-period.
The prompt reaction of the US Central Bank to this emerging softness in the US economy will be
frequently contrasted in the following months with the immobility of ECB and its perceived faulty
reading of inflation/growth tradeoffs and risks for the Euroland economy. Fluctuations of the Euro
on a slightly downward trend in January-February 2001 are determined by a comparison of “relative
softness” of the US economy and Euroland’s and by a close monitoring of Treasury Secretary
O’Neill dollar philosophy, which is looked at suspiciously because of his manufacturing
background, even though he seems to be willing to continue the “strong Dollar” stance of his two
predecessors (Rubin and Summers)42. The equivocal interview by the Treasury Secretary with a
German newspaper, on February 17, 2001, and the following day’s announcement that he would
"hire the Yankee Stadium to announce an hypothetical change in Dollar policy"43, confirm that
something is changing.
Movements of the Euro in March and April are determined by a mix of factors: by traditional ECB
fuzziness on interest rates44, which is associated to a depreciation of the Euro, by the beginning of a
42
"Mr O'Neill's testimony to the Senate finance committee helped the dollar gain almost a cent against the euro,
pushing the European currency back to $0.93 from Tuesday's $0.941. Currency traders were relieved to hear Mr O'Neill
restate the long-standing strong dollar policy. Some had feared Mr O'Neill's industry background - as chairman of
aluminium titan Alcoa - would make him keen to see a fall in the dollar. Evidence has mounted recently that the
currency's strength has been weighing on US" (FT, 1/17/2001), DUS -0.49.
43
"Paul O'Neill, the US Treasury secretary, on Friday broke with tradition by casting doubt on the long-standing policy
of a strong dollar. In an interview with Frankfurter Allgemeine Zeitung, the German daily, Mr O'Neill said: "We are
not pursuing, as it is often said, a policy of a strong dollar. In my opinion, a strong dollar is the result of a strong
economy." A swift assertion from a treasury spokesman that there had been no change in policy limited the comments'
impact on markets, but the dollar fell about half a cent against the euro anyway after the remarks" (FT, 2/16/2001),
DEU+0.71.
"Paul O'Neill, the plain-speaking US treasury secretary, has paid the price in the last week for a willingness to engage in
even the most limited public debate about the principles and practicalities of exchange rate policy. In remarkably blunt
remarks after the G7 finance ministers' and central bank governors' meeting in Palermo on Saturday, Mr O'Neill
acknowledged he had made a "mistake" in discussing with newspapers "the intellectual fabric around the subject of
dollar policy". And in a characteristically colourful declaration of intent, he said he would "hire the Yankee Stadium" to
announce any alteration to exchange rate policy from that of his predecessors, Robert Rubin and Lawrence Summers"
(FT, 2/18/2001), DEU +0.69 (also from turmoil in Turkey's financial markets).
44
"The euro pushed higher on Monday as traders continued to speculate on the prospect of an interest rate cut from the
European Central Bank later in the week. Otmar Issing, the ECB's chief economist, said that the risk to growth had
mounted while the threat posed by inflation was receding" (FT,3/26/2001), DUS + 0.39.
14
strong lobbying by NAM (National Association of Manufacturers) for a weaker Dollar to boost US
price competitiveness45, and by the continuous easing by the Fed also with a surprise rate cut on
April 19. From the end of April, the Euro weakened substantially because of a showing of what is
perceived as mismanagement of monetary policy and communication to financial markets by ECB.
In the following week, Germany produced very bad numbers on unemployment and manufacturing
orders. On May 10, ECB cut rates by a “token” quarter percentage point based on a benign revision
of M3 growth46. On the following day, five Euroland countries report higher than expected
inflation47. This whole story – highlighting ECB “ad-hockery” - caused a five-figures drop of the
Euro to a little above 0.84. The period of weakness was concluded by Wim Duisenberg saying that
an intervention was not needed to support the Euro48.
"The European Central Bank on Thursday left its key interest rates unchanged at least for a further fortnight,
underlining its determination not to be rushed into rate-cutting by the global economic slowdown" (FT, 3/29/2001),
MEU -0.24, MUS - 0.09.
"The euro fell to its lowest level of the year on Thursday as traders expressed their disappointment at the failure of the
European Central Bank to cut interest rates. The ECB is now the only main central bank to refuse to follow the Federal
Reserve since it started to cut rates in January. "The perception in the market has been that they are not doing enough to
protect European growth," said Chris Furness, senior currency strategist at economic consultancy 4Cast" (FT,
3/29/2001), MEU -0.24, MUS -0.09.
"Senior members of the European Central Bank made an effort on Wednesday to clarify the bank's monetary policy
stance after almost two weeks of confusion that have left financial markets uncertain when or whether an interest rate
cut is in the offing. The euro rose strongly on Wednesday on rising hopes of an ECB interest rate cut next week, even
though there appeared to be little in the council members' latest statements to justify it. Mr Duisenberg, giving the
barest hint that the ECB would make its first rate cut since last October, said the ECB was constantly scrutinising the
euro-zone economy for signs of easing price pressures. Financial markets raised their hopes of an ECB rate cut after
economic data pointing to a slowing economy and milder inflation in the euro-zone. German unemployment went up
and the European Commission's business climate indicator went down in March, while euro-zone producer price
inflation eased in February" (FT, 4/04/2001), MEU +0.69.
"The European Central Bank on Wednesday disappointed governments in the euro-zone by refusing to cut interest rates
and giving no sign that it would change its mind in the immediate future" (FT, 4/11/2001), MEU -0.41.
45
"Reports that the US National Association of Manufacturers planned to meet with Paul O'Neill, US treasury
secretary, to complain that the strong dollar was hurting the sector unsettled the dollar" (FT, 4/12/2001), MUS +0.76.
46
"A surprise cut in interest rates by the European Central Bank failed to lift the fortunes of the euro on Thursday. The
ECB has been the last of the main central banks to ease monetary policy in response to a swift deterioration in the
prospects for world growth. But the market's eagerness to see rates come down was partly offset by a perception that the
ECB had failed to communicate its thinking to the market" (FT, 5/10/2001), MUS -0.34.
"The euro was sent reeling against the dollar following the European Central Bank's surprise quarter-percentage-point
rate cut, amid uncertainties about the central bank's monetary policies. In the news conference following the decision,
ECB president Wim Duisenberg said that "monetary developments no longer pose a risk to price stability." A revision
in March M3 money-supply growth to 4.4% from 5% was a large factor in the rate cut, Mr. Duisenberg said, after
"significant distortions" were discovered in the original data reported April 30. Though the containment of M3 growth
is one of the ECB's main policy pillars, some were skeptical of the impetus for the ECB's switch, and suggested that this
week's series of weak German economic data was a more pressing factor" (FT, 5/10/2001), MUS -0.34.
47
"Five countries in the euro-zone on Friday reported higher than expected inflation, but the European Central Bank
said the medium-term price outlook was benign enough to justify Thursday's surprise interest rate cut. The inflation data
were published as the euro edged lower against the dollar, partly reflecting continuing dissatisfaction in financial
markets at the ECB's explanation of its decision" (FT, 5/11/2001), MEU -0.43.
48
"The euro slid to six-month lows against the dollar and sterling on Thursday after Wim Duisenberg, president of the
European Central Bank, appeared to rule out intervention to rescue the ailing currency. Speaking to reporters, Mr
Duisenberg suggested he saw no need to reverse the recent weakness of the euro, which has fallen below the rate at
which the world's main central banks intervened on September 22 last year" (FT, 5/31/2001), DEU -0.94.
15
The Euro fluctuated in June amidst talks of replacing Duisenberg49 and further lobbying by NAM
for a weaker Dollar50. In July-August, the Dollar actually started to weaken because of emerging
markets problems51 and fears of a slowdown in the US economy52, further underlined by a rather
pessimistic US Congress testimony by A.Greenspan on July 1853. The NAM was still lobbying
heavily and that was behind a sharp drop of the Dollar on August 15, on thin market conditions54.
At the end-of-August- beginning-of-September we observed sharp fluctuations of the €-$ pair for
various reasons. Then came September 11.
After 9/11 and 2002
From a macroeconomic perspective, the immediate expectation after the Twin Towers attack was
for a sharp drop in consumer sentiment55 and resulting doubts on the growth outlook for the US.
From the macrofinancial perspective, a sharply lower appetite for US assets by the rest of the world
was expected, leading to a re-emerging of the issue of the US trade deficit financing by capital
inflows56. The “news watchers” concentrated - from the end of 2001 into 2002 - on macroeconomic
announcements in the US, on evaluations by A.Greenspan of the outlook and, last but not least, on
the response to terror by the US and the geopolitical risks associated with capital flows57.
49
"European Union policymakers have begun to reconsider who should succeed Wim Duisenberg as president of the
European Central Bank. Jean-Claude Juncker, prime minister of Luxembourg, said in Frankfurt on Thursday that he
had turned down an approach to run the ECB after Mr Duisenberg's retirement, expected at some point next year" (FT,
6/28/2001), DEU -0.93.
50
"The dollar lurched more than a cent lower against the euro on Thursday after the head of the National Association of
Manufacturers said urged the US to temper its strong dollar policy. Jerry Jasinowski said the dollar was between 25 and
30 per cent overvalued and was harming US industry. Strategists said that the comments looked to have caught a market
that was short dollars" (FT, 6/14/2001), MUS +1.23.
51
"Over the past few trading sessions, the turmoil in emerging markets has been spilling over into the major currencies.
So far the impact appears to have been due largely to the unwinding of carry trades - a strategy that involves borrowing
in a low-yielding currency to invest in a high yielding currency. The swift fall in emerging markets has forced traders to
buy back the currencies used to fund such bets, most notably the yen and the Swiss franc" (FT, 7/12/2001), MEU -0.55.
52
"The dollar fell sharply against all its major counterparts, tumbling 2% against the yen and 1.5% against the euro, as
growing pessimism about the U.S. economy and more complaints about the strong-dollar policy combined to push the
currency down" (FT, 8/09/2001), MEU +0.49, MUS +0.69.
53
"The dollar was on the back foot against European currencies on Wednesday amid a renewed wave of pessimism over
US economic growth. Alan Greenspan, chairman of the Federal Reserve, gave Congress a relatively downbeat
assessment of the economy. "The period of sub-par economic performance, however, is not yet over and we are not yet
free of the risk that economic weakness will be greater than currently anticipated . . ." he said in his testimony to the
House of Representatives" (FT, 7/18/2001), DUS +1.0.
54
"The dollar slid against all major currencies again, falling nearly 2% against the yen and 1% against the euro, with the
U.S. currency still dogged by concerns about the state of the nation's economy and the Bush administration's
commitment to a strong dollar" (FT, 8/15/2001), MUS +1.60.
55
"The dollar was in retreat on Tuesday after US consumer confidence figures fell dramatically below expectations.
The Conference Board's consumer sentiment index fell from 97 in September to 85.5 in October, far below analysts
forecasts of 96. The index reached a peak of 135.8 this time last year"(FT, 10/30/2001), MUS +0.16.
56
"Foreign investors, whose faith in the U.S. economy has long propped up the dollar, are growing jittery about
American stocks and bonds. Some are already taking their money home. If the trend continues, it could damage the
dollar.terror attacks have heightened global concerns about the depth and duration of the U.S. economic slowdown.
"The risk premium of investing in equities in the U.S. has increased," says Guillaume Joncheres, who manages $37
billion in stock at Credit Lyonnais Asset Management in Paris. Mr. Joncheres says the firm has been reducing its U.S.
exposure for the past few months and has trimmed it further since the attacks"(FT, 9/25/2001), MUS +0.49.
57
"Economic activity was weak across the US in September and the first half of October, as the effects of last month's
terrorist attacks compounded downward momentum in place before September 11, the Federal Reserve said in its Beige
Book. The Fed said spending and output dropped sharply in the week after the Twin Towers attacks"(FT, 10/24/2001),
MUS +0.18.
"The dollar came under pressure from the euro and yen but was able to contain its losses in what proved to be a
rudderless market. Nevertheless, traders are losing confidence in the dollar's ability to make gains from current levels,
with doubts over the strength of the U.S. recovery underlined by Wednesday's assessment from Federal Reserve
Chairman Alan Greenspan, who appeared to avoid much of the upbeat language he used just a week ago.The dollar is
also suffering from a growing sentiment that the U.S. officials are less committed to the "strong dollar" policy, with
16
European outlook and policy issues remained largely sidelined, always focusing, though, on the
excessive conservatism of ECB monetary policy. Two further macro events occurred in this period:
the Enron scandal (from the end of November58) and the beginning of the physical circulation of the
Euro (from January 4, 2002). The Enron episode is seldom directly recalled by the collection of €-$
market-moving news in this period but is at the very heart of the sharp drop of the US stock market
in the first ten months of 2002 (and the resulting weakening of the Dollar). The launch of the Euro
was widely expected to be associated with a pick up of its exchange rate as one of the explanations
offered of its long decline was its lack of physicality. That indeed occurred from the end of March,
but it is uncertain that it occurred for this reason. In any case, the Euro begins its almost relentless
recovery vis-à-vis the Dollar59.
3.3) The Third Period – from July 22, 2002 to April 9, 2004
Ever-increasing doubts over the “strong-Dollar” policy by the US Administration, the collapse of
Wall Street following the corporate scandals of Enron, Tyco and other names, the connected
reappearing worries on the financing of the US trade deficit and – last but not least – the Iraq crisis
are all elements that explain the almost monotonic strengthening of the Euro in this period.
Between April 1 and July 19, 2002 we observed an €-$ run towards parity (a maximum of 1.015
was reached), without any solid or compelling forex market determinant, apart from an increasing
skepticism over a "strong Dollar policy" by the US60 and an ever-growing disappointment over
accounting standards and corporate morality which hit Wall Street in connection with Enron, Tyco,
and, to a lesser extent, Merck and other names61. The exchange rate of the €-$ pair went from about
some suggesting that the Bush administration's recent imposition of steel import tariffs was a recognition that domestic
industry is being hurt by the strength of the dollar.Thursday, these fears were reinforced by a resolution passed by the
National Association of Manufacturers, calling for a change in U.S. dollar policy"(FT, 3/14/2002), MEU +0.47, MUS
+0.23.
58
"In a volatile session, the dollar fell through key technical support levels against both the euro and the yen early in the
day, as the financial woes of Enron Corp. helped to amplify already-negative sentiment toward the dollar"(FT,
11/29/2001), MEU + 0.03.
59
"The dollar fell to a three-month low against the euro and remained near that level after Alan Greenspan, chairman of
the Federal Reserve, remained cautious on the strength and sustainability of the US recovery.The euro briefly broke
above its 200-day moving average of $0.8892 and although there appeared to be no particular catalyst for this move, it
was enough to encourage long suffering euro bulls."It is hard to predict when the turning point will come, but there has
long been many fundamental reasons to expect the euro to move higher," said one trader"(FT, 4/17/2002), WEU +0.59.
This is the first news with this type of code.
"The dollar came under renewed pressure, falling close to its lowest levels of the year against European currencies.
Concerns over the durability of the US economic recovery have been intensifying in recent days. These worries were
underlined after AOL Time Warner reported a $54.25bn loss for the first quarter. Confidence among economists over
growth in the second quarter is fading. This combination led to heavy selling of the dollar across the board. The euro
managed to push to within a whisker of the psychologically important $0.90 level"(FT, 4/25/2002), WEU +0.45.
60
"The dollar tumbled to its lowest level this year against the euro as traders expressed doubts about the US
administration's commitment to a strong dollar. The concerns were kindled by the testimony of Paul O'Neill, US
Treasury secretary, to the Senate Banking Committee. Although Mr O'Neill was adamant that there was no change to
policy, there was disappointment that he did not explicitly reassert the government's long-standing strong dollar
policy"(FT, 5/01/2002), WUS +0.45.
61
"U.S. stocks tumbled Monday as mounting distrust of corporate America stamped out any encouragement investors
got from a pair of surprisingly strong economic reports…… The dollar has been sliding in recent weeks, and investors
are beginning to worry that it could keep U.S. stock prices flagging and put upward pressure on interest rates. The
resignation of the chief executive of Tyco International -- a company often mentioned in stories about aggressive
accounting practices -- and accusations of artificial revenue inflation by energy companies put investors in the selling
mood ."Every time we turn around we're smacked with some sort of high-profile business turmoil: Enron, Adelphia and
17
0.8760 to a maximum of 1.0150 on July 19 and then fluctuated below parity till December 2, 2002,
when the Euro resumed its recovery for no rock-solid macroeconomic reasons but rather for the
stormy clouds concentrating over Iraq and for the belief of the definite abandonment of a strongDollar policy, after the replacement, on December 6, 2002, of the US Treasury Secretary (from
O’Neill to Snow).
The Iraq crisis began formally (at least from our forex market perspective) on August 26, 2002 when US Vice President Cheney outlined the case for a pre-emptive strike against Iraq62- and
reached a first official landmark on November 8 with the approval of the US-sponsored resolution
on the disarmament inspections in Iraq at the United Nations63. The escalation of the Iraq crisis had
an uncontroversial Dollar-negative tone. The fluctuations of the Euro were determined in this period
by a combination of Iraq news64, European slow growth and absence of any help by monetary and
fiscal policy, by mixed news on the US economy and by the widening interest rate differential in
favour of the Euro. This last element, which reached a local maximum after the 50 BP cut by the
Fed and the lack of follow-through by the ECB and the Bank of England, combined with the
uncertainties over the Dollar policy, after the substitution of the entire economic team in the US
(Treasury Secretary O’Neill and Chief Economic Adviser Larry Lindsey65), to produce the first
now Tyco is today's poster child," said John Forelli, portfolio manager at Independence Investments."(WSJ, 6/03/02),
WUS +0.90.
"The dollar slid against a range of currencies on Tuesday, amid mounting concern over standards of corporate
governance in the US. With UK markets, still on holiday to celebrate the Queen's Golden Jubilee, markets continued to
dwell on the poor performance of US stocks. The Dow Jones showed few early signs of recovering from the eightmonth low hit on Monday. Traders were still mulling the resignation of the chairman of Tyco International and the
apparent suicide of the treasurer of El Paso, the energy company"(WSJ, 6/4/02), WEU +0.32.
"The US dollar was fast heading toward parity with the euro in Wednesday's early European trade, with US equities
markets set to test September's lows after WorldCom, the US telecoms operator unveiling an apparent corporate
fraud.The company was on Wednesday teetering on the edge of bankruptcy as news of an apparent $3.8bn fraud at the
US telecoms company sent a shudder through world financial markets"(FT, 6/26/2002), MEU +1.32.
"The dollar was also hurt after a Merck & Co. unit filed a regulatory report saying it included in its earnings reports
revenue it didn't receive.Merck's Medco Health Solutions Inc. unit said it recorded $14.1 billion in revenue from its
pharmacy-benefits subsidiary during the past three years that it never collected, according to the company's filing to the
Securities and Exchange Commission" (Bloomberg, 7/08/2002), WEU +0.96.
62
"Dick Cheney, the US vice-president, on Monday made the most forceful case yet for a pre-emptive military strike
against Iraq. He argued that if the US gave Baghdad time to develop nuclear weapons and refine its chemical and
biological weapons, "the implications would be enormous". "What we must not do in the face of mortal threat is give in
to wishful thinking or wilful blindness," Mr Cheney, speaking at a gathering in Nashville of the Veterans of Foreign
Wars, said. "We will not simply look away, hope for the best, and leave the matter to some future administration to
resolve." Adding his hardline conservative view to a growing debate, he said: "The risks of inaction are far greater than
the risk of action." His tone differed markedly from that of President George W. Bush, who has been more cautious
since lawmakers criticised him for not weighing his choices enough and not consulting domestic leaders and
international allies"(FT, 8/26/2002), DUS +0.19. The following day in European trading it was DEU +0.54.
63
The dollar weakened considerably Friday as global interest-rate differentials, market repositioning and the passage of
the U.S. resolution on Iraq by the United Nations Security Council all worked against it"(WSJ, 11/08/2002), MUS
+0.23.
64
E.g. "Al-Jazeera, the Qatari-based satellite news channel, onTuesday night broadcast a tape purportedly from the
wanted Saudi militant Osama bin Laden carrying a chilling warning to European and other western states against
supporting the US.In a string of references to operations, some of them recent, carried out by suspected Islamist
militants, the speaker warned France, Britain, Canada, Australia, Germany and Italy against supporting what he called
the evil US"(FT, 11/12/2002). WUS +0.42.
65
"George W. Bush on Friday moved decisively to shake up his troubled economics team with the resignations of Paul
O'Neill, Treasury secretary, and Larry Lindsey, his chief economic adviser, signalling a White House drive to regain the
initiative on economic policy"(FT, 12/06/2002), WUS +0.92.
"Dollar weakness following a disappointing US employment report was exacerbated on Friday as two more joined the
unemployment queue - Treasury Secretary Paul O'Neill and Larry Lindsey, economic adviser to the White House.The
18
important leg of the Euro recovery above parity, from December 3, 2002, to the end of August
2003.
2003
A key element in 2003 was the final run-up to the Iraq war and its rather quick end in terms of open
war between two opposing armies. This period went from the uncovering of suspicious materials in
Iraq implying a possible breach of UN resolution 1441 (on the possession of forbidden weapons),
on January 16 66, through an escalation of threatening statements by Secretary of State Powell 67, by
Secretary of Defence Rumsfeld 68, by President Bush and UK Prime Minister Blair 69, and by
reports to the Security Council of the UN by Chief Inspectors Blix and El Baradei70, to the actual
news acted as a "double whammy" for the dollar, and helped the euro to a two-week high at $1.0128, up more
than
a cent on the day, early in the US session"FT, 12/06/2002), WUS +0.92.
66
"The discovery of empty chemical warheads in Iraq by United Nations weapons inspectors dissolved levels of support
under the dollar, pushing it to new multiyear lows against the euro and the Swiss franc on fears that a war might be
more likely now.Iraq denied that the discovery, of 11 empty chemical warheads in "excellent" condition, represented
the "smoking gun" that could precipitate a U.S.-led war, saying the weapons found were old artillery warheads that
were accounted for in its December statement"(FT, 1/16/2003), WUS +0.55.
67
"Colin Powell, US secretary of state, on Thursday acknowledged "sharp differences" between the US and its
European allies over war with Iraq and left the door open for a further UN resolution that would preserve the unity of
the transatlantic alliance.While senior US officials sought to counter the impression of Washington's isolation,
European diplomats said efforts were under way to probe the possibility of giving UN weapons inspectors more time in
Iraq. But an extension would amount to weeks, not months, they added. Russia and China, permanent members of the
UN Security Council, are lining up behind France and Germany and backing calls by the chief UN inspectors to be
given more time"(FT, 1/23/03), WEU +0.27, in anticipation of a widely expected statement.
"The dollar fell for a second day against the euro as some investors bet U.S. Secretary of State Colin Powell will present
evidence to the United Nations that will make a war with Iraq more likely. The dollar dropped to $1.0803 per euro at
8.55 a.m. in London from $1.0770. Powell is scheduled to appear before the United Nations Security Council to
present what he called ``compelling'' evidence that Iraq has weapons of mass destruction"(Bloomberg, 2/04/03), WEU
+0.43.
"The dollar fell in US trading against its major rivals, a casualty of market uncertainty ahead of a presentation by U.S.
Secretary of State Colin Powell, which is expected to further the U.S case to disarm Iraqi leader Saddam Hussein by
any means(FT, 2/04/2003), WUS +0.61.
68
"Donald Rumsfeld, US secretary of defence, said on Tuesday the US could still go to war if the British government
decided to pull its forces out of an Iraqi invasion, but emphasised that UK participation in an attack "would obviously
be welcomed".Following a meeting withGeoff Hoon, UK defence minister, Mr Rumsfeld said the US was in nearly
daily contact with the British government regarding the role of UK forces in an invasion, but said there were "workarounds" - contingency plans - if Tony Blair opted out"(FT, 3/11/2004), WEU +0.22.
69
"The dollar fell against the yen and the euro as U.S. President George W. Bush said Iraq is in defiance of demands to
end its development of weapons, making a war more in the Middle East country more likely"(Bloomberg, 1/29/2003),
WEU +0.47,in anticipation.
"The dollar fell back to its lowest level this week against the Euro on Thursday as further hawkish rhetoric from
President Bush and Tony Blair, the UK prime minister, sparked fresh investor concerns about the likelihood of US-led
military action against Iraq.The greenback's ongoing sensitivity to geopolitical events was highlighted as it fell more
than a cent against the euro after news broke overnight that Iraq's Al Samoud 2 missile system had a longer operational
range than is allowed, the first clear sign Baghdad has continued to develop weapons in defiance of UN"(FT2/13/2003),
WEU +0.41, WUS +0.77.
"The dollar fell to a four-year low against the euro after President George W. Bush said the U.S. doesn't need United
Nations backing to attack Iraq, boosting speculation an attack will begin by the end of this month"(FT, 3/07/2003),
WEU +0.65.
"By the standard of recent sessions, the dollar had a quiet day on Tuesday, as investors paused for breath in the midst
of a US ultimatum to Saddam Hussein to leave Iraq.The currency continued to move higher, extending its rally to four
days and more than 4 per cent, but gains were harder won as a note of caution re-entered the market.Mr Bush, in a
television address on Monday night, told Saddam that he and his sons had 48 hours to leave Iraq or face war after the
US and UK abandoned diplomatic efforts to disarm the country"(FT, 3/18/2003), WEU +0.51.
70
"The dollar fell for a record 10th day against the euro amid speculation United Nations chief weapons inspector Hans
Blix will tell the Security Council that Iraq has failed to comply with a resolution to disarm(Bloomberg, 1/27/2003),
19
beginning of the Iraq invasion on March 20, to the fluctuating phases of the war until the almost
symbolic capture of Baghdad, with the toppling of Saddam Hussein’s statue in the main square of
the city on April 9.
After the end of the open fight, Iraq stops having a direct effect on the US currency. A Dollarnegative impulse originated now from the growing belief that the US Administration is not anymore
behind a strong Dollar and from ever-increasing concern on the US growth outlook71. It is
interesting to notice that the €-$ exchange rate went from about 1.0500 at the beginning of the final
phase of the Iraq crisis, in January 2003, to about 1.0800 on the day the statue of Saddam fell (April
9). The following leg of Dollar depreciation after the official end of the war, induced by dollar
policy doubts and concern on the US economy, produced a much wider jump: from 1.0800, on
April 9, to the peak of 1.1900, between the end of May and the beginning of June 2003, when a
correction occurred, apparently for the simple and single reason that the currency pair reached its
maximum since the existence of the Euro. The subsequent correction continued through the
Summer, until about 1.085 up to the end of August, determined by no specific catalyst, except a
good stock market run in Wall Street.
Post-Dubai and 2004
A major shock hit the foreign exchange market from September 19-20, 2003, before and after a
much-heralded Finance Ministers G7 meeting in Dubai, where an explicit reference to exchange
rates was included in the final communiqué in terms of an hoped-for “greater flexibility of
exchanged rates”, mostly referred to Asian currencies (Chinese Yuan and Japanese Yen, artificially
pegged or stabilized to the US Dollar) but de facto produced a sharp jump of the Euro in September
and again later from November72. The post-Dubai phase was characterized by two very steep
WEU +0.39, in anticipation.
"Mohamed ElBaradei, head of the International Atomic Energy Agency, said on Thursday that, in his view, Iraq was
not in material breach of UN Resolution 1441, contradicting the views expressed by the UK and US governments"(FT,
1/30/2003), WEU -0.85, also for other concurrent news.
"US efforts to secure a final United Nations resolution before leading a war against Iraq received a boost on Thursday
night from a draft report by Hans Blix, the chief UN weapons inspector, who described the results of disarmament
efforts so far as "very limited".Security Council members expected to see a final version on Friday, but a draft copy
obtained by the BBC said Iraq "could have made greater efforts to find any remaining proscribed items or provide
credible evidence showing the absence of such items"(FT,2/27/2003), WEU +0.37, in anticipation.
71
"The dollar extended Tuesday's retreat against the euro on Wednesday as investors, watching TV pictures of
celebrating Iraqis alongside US soldiers in Baghdad, appeared to be turning their attention once more to the health of
the US economy(F/4/09/2003), WEU +0.24, WUS +0.26.
"The dollar fell to $1.16 against the euro for the first time in more than four years after Treasury Secretary John Snow
suggested the U.S. isn't concerned with the currency's 21percent slide in the past year. The drop in the U.S. currency
``helps exports, and I think exports are getting stronger as a result,'' Snow told ABC television's ``This Week'' program
over the weekend"(Bloomberg, 5/12/2003), DEU +1.02.
72
"The dollar tumbled across the board Friday, buckling under huge selling pressure ahead of the meeting in Dubai
Saturday of finance ministers and central bankers from the Group of Seven leading industrialized nations.Investors
continued to buy up yen on the bet that Japanese monetary authorities wouldn't intervene going into an international
event with currency policy high on the agenda(WSJ, 9/19/2003), MEU +0.59, MUS +0.49.
"Anticipation of possible sustained pressure on the dollar swept through financial markets around the world on Monday
after the weekend meeting of G7 industrial nations.The US currency tumbled to a near-three-year low against the yen,
stock markets from Tokyo to Wall Street were shaken by the potential impact on exporters, the yield on US Treasuries
jumped and precious metals rose as investors sought safe havens. Markets concluded that the G7 call for "more
flexibility in exchange rates" would force Asian central banks to ease currency intervention which has kept the dollar
strong and favoured domestic exporters"(FT, 9/22/2003), MEU +1.07.
"The dollar fell to a fresh low against the euro on Wednesday as the selling that took currency investors by surprise on
Tuesday continued. The euro reached a new lifetime high against the dollar at $1.2128 in midday European trade,
beating the $1.2113 high it set in early Asian trade. Sterling was at $1.7296, off the $1.7317 five-year peak it set in the
Asian session.The dollar failed to take comfort in data showing US productivity grew by its fastest rate in the third
quarter, and the euro held near its highs, trading at $1.208 by mid-session in New York."The market is increasingly
20
appreciation phases of the Euro. The first, as we noted above, was the consequence of the Dubai
G7; the second, from early November 2003 to mid-January 2004, was determined by consolidation
in the market of the belief of a weak-Dollar policy on the part of the US Authorities73, not
sufficiently counteracted by European Policy Makers (up to a point), by frequent terror warnings in
the US, in Europe and even in Japan74, and by the eruption of a seemingly unstoppable guerrilla
warfare in Iraq and troubles in Palestine. The Euro reached twice a peak of 1.2900. The first time it
was stopped by a concerted verbal intervention by ECB top officials (Trichet, Welteke, Noyer),
around mid-January 2004, the second time, in mid-February, by fears of verbal interventions. After
this last spike, the Euro has been pushed back around 1.2000 – and fluctuating thereabouts - in the
remaining part of our sample by a number of conflicting factors: a very welcome strengthening of
the US labour market, in March and April ($-positive), concern about the financing of the huge US
current account deficit ($-negative), further verbal interventions by top European Policy Makers
(Schroeder and Raffarin, on February 26 2004, complain for excessive Euro strength75), hints by
Trichet and other ECB officials76 of possible interest rate cuts (€-negative, in this phase).
4.) The Econometrics of News Impact
We modeled the twice-daily exchange rate returns of the €-$ spot exchange rate (EUUSETZ and
EUUSATZ, see Tab. 4.1 for the description of the symbols used in this paper) using one equation
for each area (ETZ and ATZ) and making reference to the formulation in (1.1) in paragraph 1. Each
equation was expressed as a linear function of fundamentals and of various news, both scheduled
and unscheduled, as indicated in the following equations.
seeing the dollar's fall as a one-way bet - it's an early Christmas present for those closing their books and taking profits
this month," said Gary Noone, analyst at MMS(FT, 12/03/2003), WEU +0.25, WUS +0.11, after a WUS +1.02 the
previous day.
73
"Then came an interview with Mr. Snow on Bloomberg Television. Asked if he was concerned about the dollar's
depreciation, the Treasury secretary said he wasn't, adding that "this whole adjustment process has been orderly.""The
dollar on a trade-weighted basis is still higher than it has been for most of the last 25 years," Mr. Snow said.Dealers said
Mr. Snow's comments effectively gave the market a green light to sell the dollar"(WSJ, 12/12/2003), WEU +0.45, WUS
+0.40.
74
"Geopolitical concerns resurfaced in the currency markets on Monday on reports al-Qaeda could target Japan and
following the weekend bombings in Turkey. European traders also looked to the heavy security planned for the state
visit of president George W Bush to the UK which begins on Tuesday.The jitters first sent the yen lower in Asian hours,
and helped keep the dollar under pressure throughout most of the European session(FT, 11/17/2003), WEU +0.20.
"Jean Claude Trichet, the European Central Bank president, on Monday gave his strongest signal yet of mounting
concern in Europe over the rapid rise of the euro, saying "brutal" moves in the dollar were unwelcome"(FT,
1/12/2004), DUS -0.81.
"European Central Bank council member Ernst Welteke said he's concerned the stronger euro risks reining in a recovery
in Germany's economy, Europe's largest. ``We fear that the appreciation of the euro could put a brake on the recovery,''
Welteke, who also heads the Bundesbank, said in a speech in Berlin"(FT, 1/13/2004), DEU +0.02.
"The euro dropped against the dollar in London after European Central Bank council member Christian Noyer said
currency sales are an option for the central bank"(FT 1/14/2004), DEU -0.74.
75
"The growing prospect of a rate cut by the European Central Bank sent the euro to a four-week low against the dollar
on Thursday. Jean-Pierre Raffarin, the French prime minister, echoed German chancellor Gerhard Schröder when he
said the euro-dollar rate was "not good for the either the US or Europe"(FT2/26/2004), WEU -0.52, WUS -0.11.
76
"European Central Bank President Jean- Claude Trichet said the bank may lower its economic growth forecasts if
consumer demand fails to pick up, stoking speculation about a reduction in interest rates. The euro fell against the
dollar and interest-rate futures prices surged after the comments from Trichet and fellow ECB council member Guy
Quaden. Quaden, head of Belgium's central bank, told French newspaper Le Monde that the ECB still has ``some
ammunition'' to boost economic growth"(Blomberg, 3/24/2004), DEU -1.32.
21
b
c
d
e =1
e =1
e =1
f
g
h
a =1
a =1
a =1
EUUSETZ t = α + ∑ β e FUNDETZ e,t + ∑ γ e SKETZ e ,t + ∑ δ eUNSKETZ e ,t + ε t
EUUSATZ t =α + ∑ ϑ a FUNDATZ a ,t + ∑ λ a SKATZ a ,t + ∑ κ aUNSKATZ a ,t + ε t
(4.1)
( 4 .2 )
All the literature on exchange rates and news estimates contemporaneous relationships, what we
call the "Rational Model" (equations 1 and 2 in Tables 4.3 - 4.8), using all available information at
the time the endogenous phenomenon occurs, as in the above two equations (4.1) and (4.2). As we
mentioned in Section 1, the use of unscheduled news is relatively new in this line of research.
Scheduled news, though, have been used extensively, a much larger set than the one we will use
below (one in ETZ and three in ATZ). We employed this small set at the end of a reduction process
from a much larger number 77.
To investigate the issue whether the sign of surprises (i.e. positive and negative events for the Euro)
produced different effects, we divided each news variable into two series. One series including
only positive surprises and one series comprising only negative surprises78. Moreover, for
macroeconomic scheduled news we addressed also the issues as to whether the size of news could
produce asymmetric effects. To this end, we divided the series of scheduled news into three
components: large positive news (LP), large negative news (LN) and average news, both positive
and negative (AV). For each macroeconomic news items, the distinction into large (positive and
negative) and average was based on identification of those quantitative outcomes that would deviate
more than one standard deviation from the news’ sample mean.
These above three categories of news (LP, LN and AV), combined with the series of positive and
negative ones, can account for all possible asymmetries of every order of magnitude. To test for
asymmetric reactions to signs and sizes of scheduled news and to test the relevance of stale news,
we followed the following three-step procedure:
1) Firstly, for each trading area, we estimated a standard equation, according to the rational/market
efficient paradigm for the period January 4th 1999 - April 9th 2004, identifying the fundamentals
and those news items - scheduled and unscheduled, positive and negative, large and average, as
indicated above - that were statistically and economically relevant in affecting the returns of the
exchange rate. They are the equations 1 and 2 in Tables 4.2 - 4.8.
2) Secondly, in these standard- type equations - that could be represented as (4.1) and (4.2) - we
then included some additional news: the news of the previous trading area, and past news of the
77
The specification search and reduction process for scheduled news is described in CAGLIESI-TIVEGNA(2005). The
larger group of scheduled news we started with is the following. For ETZ: German unemployment, manufacturing
orders, retail sales, IFO, PPI, preliminary CPI, industrial production, GDP, Euro Area M3. For ETZ: consumer
confidence (Conference Board), non-farm payrolls, unemployment rate, average weekly earnings, CPI, PPI, durable
goods orders, industrial production, leading indicators, ISM (formerly NAPM) index, retail sales, GDP, GDP deflator,
private consumption expenditure, private income, factory orders. Both ETZ and ATZ variables are non exhaustive with
respect to what is published monthly and weekly by European and American statistical authorities, but were indicated
by traders as the most permanent market moving macroeconomic indicators. Others have become more fashionable in
recent times (e.g. the trade balance, the US Treasury capital inflows, the weekly initial claims, etc.). We plan to add
them in the future.
78
The negative surprises were taken in absolute value. The sign of the estimated coefficient indicates the positive or
negative effect produced by the news.
22
same trading area. Thus, for instance, in the equation of the exchange rate returns in ATZ, (4.4)
below , we included three types of news. The news that occurred during that day in the
American zone (SKATZt, UNSKATZt), the news that had occurred that day during the trading
period in Europe (SKETZt, UNSKETZt) and the news of the American zones that occurred
during the previous trading day (SKATZt-1,UNSKATZt-1). These are the equations:
b
d
g
e =1
a =1
c
EUUSETZ t = α + ∑ β e FUNDETZ e ,t + ∑ γ e SKETZ e ,t + ∑ δ eUNSKETZ e ,t + ∑ µ a SKATZ a ,t −1 +
e =1
e =1
c
∑ν
e =1
e
h
d
a =1
e =1
SKETZ e,t −1 + ∑ π aUNSKATZ a ,t −1 ∑ ρ eUNSKETZ e ,t −1 + ε t
f
g
h
a =1
a =1
(4.3)
c
EUUSATZt = α + ∑ϑa FUNDATZa,t + ∑ λa SKATZa ,t + ∑ κ aUNSKATZa ,t +∑ χ e,t SKETZe,t +
a =1
g
∑σ
a =1
a
d
h
e =1
a =1
e =1
SKATZa ,t −1 + ∑ψ eUNSKETZe,t + ∑τ aUNSKATZa ,t −1 + ε t
(4.4)
As expected, no past news in any area exerted any explanatory effect, except for the past UOC in
the American zone (see Table 4.2, equation 2, coefficient 9). This finding confirms, and it is
consistent with the vast empirical work produced in the literature of exchange rate and news79.
3) Thirdly we tested for regime breaks80. By using a Chow dummy type of test, we identified two
breaking points and three regimes. The first regime runs from January 4, 1999 to December 15,
2000 and corresponds to the phase of the falling value of the Euro. The second regime, running
from December 18, 2000 to July 19, 2002 and it corresponds to the phase of a strong but stable
79
See footnotes 2 and 3.
The identification of different regimes was the result of an iterative procedure. We started out by looking at a
detailed historical prospective and analysis of the data in our sample to see if we could interpret trigger points and
events that had determined some idiosyncratic switches of trading themes and sentiments in the exchange rate market.
The historical interpretation offered us some broad indication about possible exchange rate regime. We corroborated
this first round identification by running the Hansen general stability test with unknown breaking points. Hansen’s test
is implemented in RATS as a procedure testing the joint hypotheses of constancy of all coefficients and variance, as
well as individual coefficients and variance. The procedure provided us with a better indication about possible structural
breaking points. We then applied a Chow dummy test that allows accounting for possible heteroskedasticity and for
constancy of some coefficients (CHOW(1983)). We estimated the model by using Robusterrors procedure, to take into
account the fact that different regimes might have different variances of the error term (as also indicated by Hansen’s
test). The test statistic is thus a Chi square. For each area, we tested only the «rational/efficient hypotheses» model,
without any lagged news and any asymmetries. The stability hypothesis was tested firstly over a version of the rational
specification that included only the fundamentals, and subsequently was tested using all current news, scheduled and
unscheduled. For all estimates in all areas, the null hypothesis of stability was rejected. The results were as follows: for
the American zone, Chi-square(14) = 24.01 with a significance level of 4.56%, and Chi-square(25)= 43.63 with a
significance level of 1.2%; for the European zone, Chi-square(8)=29.86 with a significance level of 0.02% and Chisquare(15)=66.03 with a significance level of 0%.
80
23
value of the dollar. The third regime, running from July 22, 2002 to April 9, 2004 corresponds
to the phase of rising value of the Euro.
4) Fourthly, for each regime, we re-estimated the standard rational/efficient market model
equations (4.1) and (4.2) allowing also for asymmetries to both signs and orders of magnitude of
news, as in equations (4.3) and (4.4).
Differently from the results of the entire period, sub 1) and 2) shown in Tab. 4.2, and from previous
empirical studies on news81, we obtained a quite surprising finding, conflicting with the
rational/efficient market hypothesis: stale news has predictive power and affects the returns of the
exchange rate. 82
One hypothesis to justify this «anomaly» of the efficiency market hypothesis is of statistical order
and nature. It could result from a mis-specification of the dynamics of the «rational model»
exchange rate equation. However, if the omitted factors of the dynamics cannot be identified, this
hypothesis is not testable. Moreover, the fact that the anomaly does not show over the entire
sample period seems to suggest that the mis-specified equation is actually the one that disregards
the breaks.
This is consistent with the history of the first years of existence of the Euro and with a common
opinion of many traders: the foreign exchange market goes through various and different phases
where traders focus on different market-moving factors. We thus have, historically, the big movers
of the eighties, the weekly money stock announcements, after the regime change in monetary policy
in the US in the early eighties, and the US trade balance, after the big revaluation of the Dollar in
the mid-eighties. In the late nineties, inside our sample period, the frequency of "changing
idiosyncrasies" by financial markets increases considerably. We could econometrically isolate
three, but the short-term "market fetishes" come about much more frequently83 .
An alternative hypothesis for the anomaly can be formulated in terms of behavioral theory. We
recognize that the findings of market inefficiency «anomaly» is neither a proof of agents’
irrationality, nor a statistical evidence of behavioral hypotheses as postulated by the Prospect
Theory. 84 Moreover, our goal here is not to focus on empirical tests of the over-reaction or underreaction hypothesis. However, we are interested in presenting and interpreting some empirical
evidence that deserve attention because it represents a violation of the semi-strong form of the
efficiency market hypothesis. Thus, although we do not claim that this violation is a proof that
agents fail to revise their expectation according to Bayes’ rule, nevertheless we will interpret these
findings as an indication that when different regimes are taken into account, the model deviates
from the pure rational/efficient market hypothesis, and that its implications do not longer hold.
In this spirit, we shall identify two main types of subsequent corrective reaction to past news: a
reaction producing a reinforcing effect and a reaction producing a re-adjustment effect. The former
effect is similar to the under-reaction effect of the behavioral economics literature, whilst the latter
is similar to the over-reaction effect.
Over-reaction and under-reaction are well-established
81
Footnotes 2 and 3.
According to FAMA(1970), the semi-strong form of the Efficiency Market Hypothesis (EMH) posits that it is not
possible to earn a superior risk-adjusted return based on the knowledge of any publicly available information. Thus past
news announcements cannot be used to predict returns.
83
See second paragraph.
84
TVERSKY- KAHNEMAN(1974) provided experimental psychological evidence that under uncertainty people fail to
calculate risk rationally but value the comfort of herds and are far more frightened of losses than inspired by potential
gains.
82
24
behavioral principles, widely investigated and empirically tested in finance 85. They have been
used to explain price reversal or price trendiness following the initial impact of the news.
Here we prefer to use the term «reinforcing» (RE) and «re-adjustment» (RA) to typify the following
subsequent reactions to stale news: a reinforcing effect is a subsequent action of the same sign as
the initial impact of the news, whilst a re-adjustment effect is a corrective action having an opposite
sign with respect to the initial impact of the news.
We can find many examples of RE and RA in the foreign exchange market. In this huge twobillion-dollar-a-day environment, each market interpretation and action by a single participant is
critically dependent for its success on a sizable amount of similar actions by others. So typically
some form of conformism (causing herd behavior in limiting cases) is the name of the game here.
RE can be observed more frequently in periods of extreme polarization in one direction, as in the
first (Euro weakness) and third regime (Euro strength). In this case forex traders look for all sorts of
"excuses" (trading decisions weak on analysis but dictated by the market sentiment of the moment)
to justify their market positioning. Strong market signals and news - exerting sharply different
effects in other moments - tend to be disregarded and the exchange rate is dominated by RE stimuli.
RA moves become more frequent near technical peaks, when the market is "over-stretched" - in the
jargon of traders - and in the proximity of turning points. Here the forex community becomes more
heterogeneous so that RE and RA episodes occur side by side. Our second regime has many
episodes like this.
An additional justification to prefer terms such as RE and RA to over-reaction and under-reaction is
dictated by our dealing with some «hybrid cases» of reaction to those lagged announcements and
surprises coming from a different trading area. These cases are hybrid in this respect: the correction
does not follow investors’ own initial reaction, but rather it is a revision of other investors’
interpretation of news, and it is based on traders’ perception of someone else’s beliefs. To our
knowledge, these events do not constitute pure cases of either over-reaction or under-reaction
hypotheses.
In section 4.4) we shall focus more in detail on the results on lagged news. Being so relevant to
identify RE and RA patterns and being the latter so widespread in the recent history of the Euro, we
can say that the number of relevant news and the typology of reaction to lagged (RE) and (RA)
news depend on all the sample segmentations used in this paper: 1) on the area, 2) on the three
regimes and 3) on the type of news (bad or good).
4.1) Estimation procedure
We run OLS estimates of all equations testing each equation in each regime for heteroskedasticity
and serial correlation. The results of the tests are reported in Tables 4.3 - 4.8. We found two cases,
period one and period two for the European trading zones, of violation of the basic OLS hypotheses.
For all types of equations – from pure rational./efficient model to the final specification with lagged
news - we found statistical evidence of heteroskedasticity (period one Europe, Tab. 4.3) and serial
85
Investors’ interpretation of news that follows representativeness heuristic principle –extrapolation of trends- generates
price over-reaction, whereas, investors’ beliefs based on conservatism –slow updating of models- generates price underreaction. See THALER(1993) and SHLEIFER(2000)
25
correlation (period two Europe, Tab. 4.4). We corrected the violation of the null hypothesis by
using Robust Errors estimators (with 4 lags in the case of serial correlation). 86
For the final specification of the equations (equation 5 in the tables for the the three regimes), we
computed standardized coefficients, so as to be able to compare coefficients directly and rank the
contribution of each explanatory variable to the explanation of the dependent variable. 87
Looking at Tables 4.3 - 4.8, the general estimation strategy in the three sub-samples has been that of
moving from the Rational Model of equations 1 and 2 to the two dynamic specifications in
equations 3 and 4 followed by a reduction from the latter two equations to the Final Model
(equation 5). As we mentioned earlier, we try to test the violations to the EMH (going from
equations 1-2 to 3-4), we then clean up all the non-significant variables, taking also into account
possible distortions caused by multicollinearity.
4.2) General Results
In analyzing the results we shall proceed as follows: first we shall compare and contrast similarities
and differences across trading areas, within each regime and through time in (4.2.1); secondly we
shall focus on asymmetric responses to news, in (4.2.2). Lastly, we shall concentrate more
specifically on interpreting lagged news, in 4.2.3. For each regime and each trading area, we shall
discuss the results by focusing on the signs of coefficients, relative contribution of variables and
on the presence of asymmetric reactions to good-bad news and to large-small news.
4.2.1) Areas, Regimes and Asymmetries
Summarizing very briefly some dynamic developments along areas and regimes, we find:
1) There is progressively stronger reaction to previous area's variations of the exchange rate in the
European trading zone (coefficient 2 in Tables 4.3 - 4.5).
2) Long-term interest rates, as proxies of the direction of monetary policies, do not exert any
particularly relevant role (coefficients 3 and 4 in all equations). This fact is quite evident in
period one (Tabs. 4.3, for ETZ, and 4.6, for ATZ) and three (Tabs. 4.5, for ETZ, and 4.8, for
ATZ), when the final cumulative effect of the two areas to long term rates is almost zero. 88
This could be due to polarization of €-$ in these periods. Only in regime two, which
corresponds to a period of more uncertainty, and only for the American market - whose
economy is scanned closely to evaluate the effects of 9/11 - do long term rates provide some
information and «guidance» over the possible future course of events.
3) For US trading, fundamentals - especially the Dow Jones - have always played a substantial
role in affecting the exchange rate, ranking first among all variables in terms of the size of the
impact coefficient (coefficients 2 - 7 in Tabs. 4.6 - 4.8).
4) In the European trading area, news surprises dominate fundamentals. Among all news, the
unscheduled variables have a prominent role (Tabs. 4.3 - 4.5).
5) In ATZ European macroeconomic news (only the German IFO, in our case) are never
significant (Tabs. 4.6 - 4.8).
6) European traders become progressively less and less responsive to their area's macroeconomic
news and more reactive to American macroeconomic news (Tabs 4.6 - 4.8).
86
The Robusterrors procedure to correct heteroskedasticity or serial correlation, applies OLS and then corrects the
estimated covariance matrix under more complex assumptions on the residuals. See HAYASHI(2000) for more
technical details.
87
See PINDYCK-RUBINFELD(1997) page 98 on standardized coefficients.
88
The effects in the areas cancel each other out.
26
In period one, surprises that reinforce the tendency of a weak Euro have stronger effects than news
«against the trend»in Europe (Tab. 4.3, equation 5, standardized coefficients 89 5,6). However,
large surprises generate corrective actions, as they could be interpreted as triggers that could invert
the rising trend of the dollar (same, coefficients 7,8).
Two interesting findings are worth noticing: firstly, long-term interest rates exert mild effects.
Moreover, in Europe, the negative sign of the European rates suggests that the price effect could
dominate the interest rate effect: thus bearish expectations (because of slow growth) on long-term
interest rates exerted a positive effect on the Euro (same, coefficients 3,4). However, if we
considered the cumulative coefficient (American and European reaction to European rates), this
variable has the expected positive sign.
The second interesting finding is the subsequent reaction to oral intervention of the European
Central Bank in favor of the Euro that reduces the initial impact effect (Tab. 4.3, equation 5,
coefficients 14, 15). This correction could be interpreted as the market «susceptibility» to the lack
of transparency and of propriety of announcements of the European Central Bank (see paragraph 3).
Period two is a period of relative stability for the Dollar at a high level. During this regime,
reactions to surprises are «mixed» shifting between sentiments of possibly an even stronger dollar,
dollar stability, or inversion of dollar path. The significant effects of American monetary policy
confirm investors’ uncertainty about future path of the dollar, and suggest that monetary policy
becomes more «informative» under an uncertainty climate than under a polarized one.
The third regime is characterized by a generalized sentiment of strengthening of the Euro.
Monetary policy does not play the canonical theoretical role on the exchange rate. The Euro
appreciates in spite of significant reduction of long-term interest rates.
If we consider the
cumulative effects of the areas to TUSB, then American monetary policy has the expected correct
sign but it exerts very weak effects, indicating that this variable is almost irrelevant. This is
understandable under the extreme polarization of this period.
4.2.2) Lagged News: Geographic Factors
It is interesting to notice (Tabs. 4.3 - 4.8) that approximately the two-thirds of the total lagged news
for the three periods, are concentrated in the European trading area, implying that there is a different
«geographic» attitude of investors and market traders in interpreting news. This result parallels
those highlighted in paragraph 2 on the reason why the number of unscheduled news events is much
higher in ETZ than ATZ: ETZ is a longer lasting time zone frequently operating in thinner market
conditions than ATZ; ETZ is full of "disclosing activity" by European policy makers generally in
sharp disagreement over the "right" value for the Euro. No surprise that in Europe traders must use
"tea leaves" to a greater extent than in ATZ, where scheduled news on the largest economy in the
world offers much more reliable guidelines than elsewhere.
This idea is confirmed when we look at the «geographic» distribution and type of stale news. In the
American area half of the total lagged news is represented by scheduled news, none of them from
the European area. The other half is represented by unscheduled news and only one-third reacted to
European news. Thus overall, in the American trading area, investors and traders correct mainly
American news. This finding is consistent with the fact that relevant news in the American zones is
89
In this paragraph 4 we will make reference to the standardized coefficients of the Final Model, equation 5 of the
different tables, unless otherwise indicated.
27
overwhelmingly American. Of all the 34 news, current and past, relevant to the American trading
area under all regimes, only two (approximately 6%) are reactions to stale European news.
4.2.3) Lagged News and Corrective Actions: Reinforcing and Re- adjusting
As explained earlier, in our equations lagged news, when statistically relevant, can generate two
types of corrective actions: a reinforcing reaction, (RE) or a re-adjustment (RA).
Moreover, in our case the mapping of different reactions must also take into account the fact that
investors of one area can react to news of another area.
Overall, during the entire sample period, out of 31 lagged news items, we can find 9 cases of
reinforcing movement (five of them concentrated in period when the Iraq crisis is at its climax)
and 21 cases of re-adjustments (fifteen in the last two periods when doubts grow overtime over the
commitment by the US Authorities to a "strong Dollar" policy).
Two results further underline the heterogeneity between ETZ and ATZ trading patterns. Firstly, the
number of re-adjustment actions in the European trading area falls progressively from period one to
period three, whilst the opposite occurs for the American area, even though the underlying scenario
is the same for both areas. In the last regime, the cases of American re-adjustments outnumber the
European ones. Secondly, European traders re-adjust progressively less often to American news,
in going from period one to period three. American traders re-adjust progressively more often to
their own previous action.
4.3) Main Findings
We summarize here the main results of our analysis in this Section 90
1. Lagged news variables have predictive power and affect the returns of the exchange rate
once we move from estimation over the entire period to sub-periods. This is a surprising
result conflicting with the rational/efficient market hypothesis. The fact that this anomaly
does not show over the entire sample period seems to suggest that this is due precisely to a
90
We investigated further the occurrence of regime switches by modeling the probability of the switches with a Probit
model. The results are contained in CAGLIESI-TIVEGNA (2005). Here we summarize the main findings that reinforce
the results obtained in this paper.
• For both ETZ and ATZ, unscheduled news has a predominant role in affecting the degree of confidence of the Euro
and hence the probability of regime switches. The only scheduled news affecting the probability of the switch - in
both areas . is the US Non-farm payroll.
• The only fundamentals exerting any effects in ATZ are the past value of the Dow Jones and the European longterm interest rates. Likewise in Europe, we found the occurrence of a «polarization» phenomenon and the
dominance of the price effect (bearish traders).
• Differently from ETZ traders, ATZ traders seem to have a very consistent pattern towards asymmetries: they
believe in the mighty Greenback and so they are really stricken only by Euro positive (thus Dollar negative)
unscheduled surprises. As for the scheduled news, they are really moved only by positive surprise on the US Nonfarm payroll.
• The unscheduled news events which exert the highest contribution to regime switches relevant unscheduled
surprises are DUSP, WUSP and WEUP. Indeed the last variable represents the only European news in the USA
trading area.
• In both ETZ and ATZ, past information (lagged news) matter to «create» a perception of the strength or weakness
of the Euro. In particular, we found a more articulated dynamics, with news exerting effects immediately and for
six consecutive lags.
28
2.
3.
4.
5.
6.
7.
8.
disregard of the breaks. This is consistent with recent history of the Euro and with the
common observation that the forex market goes through various phases where traders focus
on different market-moving factors.
The results of our estimates once looked at jointly with the recent history of the €-$ market
in Section 3 indicate that a deeper grasp of its fluctuations can came from the behavioral
finance toolkit. We adapted the over-under reaction schemes to our results, finding many
episodes of reinforcing and re-adjusting responses of the exchange rate to news.
The estimates of the second coefficient of Tabs. 4.3 – 4.8 show a very important
explanatory power of the log variation of the exchange rate in the previous trading area
indicating a mean reversion during the global trading day.
Interest rates exert a significant, but weak, effect.
The movements of the US stock market in ATZ play a substantial role in the exchange rate
fluctuations.
In the European trading area unscheduled news surprises determine €-$ movements much
more than fundamentals and scheduled news.
There is a remarkable geographic diversification in the distribution between ETZ and ATZ
of total lagged news for the three periods. Two thirds of them are concentrated in the
European trading area – many of them originating from ATZ - one third in ATZ. When we
look into this third, we see that US investors and traders correct mainly American news.
This finding is consistent with the fact that relevant news in the American zones is
overwhelmingly American.
We find evidence of heterogeneity in trading patterns between ETZ and ATZ, as the number
of re-adjustment actions in the European trading area falls progressively from period one to
period three, whilst the opposite occurs for the American area, even though the underlying
scenario is the same for both areas.
5 .) Summary and Conclusions
In this paper we studied the determinants of the €-$ exchange rate, since its inception in 1999, using
the news approach to exchange rate modeling and some behavioral finance categories in the
interpretation of our results. A twice-daily frequency of estimation was chosen dividing the global
trading day into an European Time Zone, ETZ (including also Asian trading), and an American
Time Zone, ATZ.
A new typology of news variables, unscheduled news, was employed, together with the traditional
scheduled macroeconomic news. These news events, consisting of policy statements, market events,
market beliefs, terror-related events (described with greater detail in the second Section), turned out
to be the main determinants of €-$ movements.
The econometric estimation was carried out over the entire period of Euro existence till April 9,
2004. Coefficient stability tests suggested to divide this time span into three sub-periods roughly
corresponding to the first Euro-weakening period, until December 2000, to the subsequent period of
fluctuation over a flat trend, until the Summer of 2002, to the third period of the appreciating Euro.
Econometric estimates were supported by a detailed history of the period, which corroborated the
above partition, and was also useful in two other respects. They show the variety of non-economic
and non-financial factors affecting exchange rates (all collected in the unscheduled news vector)
and visualize many examples of unscheduled news in their natural environment.
29
The main finding of our analysis is the rejection of the semi-strong EMH, once we move from the
estimation over the entire sample of our model of €-$ to the three sub-periods. Here we find many
lagged news variables to be significant, contrary to what EMH posits.
The distribution of lagged news across time zones (ETZ and ATZ) and among the three subperiods, or regimes, indicates a substantial heterogeneity in the way news items are decoded by
market participants. ETZ equations contain a higher proportion of lagged news, a good part of them
originating in ATZ. Exchange rate in this latter zone reacts almost exclusively to American news,
contemporaneous and lagged, indicating that this zone influences the rest of the world but it is not
affected by it.
Scheduled news events play a much bigger role in ATZ than in ETZ, especially the creation of new
jobs in the US (the Non-farm Payroll). Exchange rate dynamics in ETZ are determined mostly by
unscheduled news.
This paper is part of an ongoing research activity on news modeling of exchange rates and on the
use of these models to build trading rules in the foreign exchange market. News on $-¥, £-$ and €-£
have been collected; so the same line of research carried out in this paper will be applied in the near
future to these exchange rate pairs.
30
TABLE 2.1 - ABSOLUTE AND PERCENTAGE VALUES OF SCHEDULED AND UNSCHEDULED NEWS
ALL UNSCHEDULED NEWS
ETZ
ATZ
1 Number of News
2 % on Total Observ.
462
33,6
274
19,9
3 Number of Positive News.
4 % on Total Unsched. News
231
50
5 Number of Negative News.
6 % on Total Unsched. News
231
50
SCHEDULED NEWS
GERMAN
IFO
US
PAYROLLS
25 Number of News
26 % on Total Unsched. News
60
12,9
64
23,3
156
56,9
27 Number of Positive News.
28 % on This Type of Pos.News
29
48,3
39
60,9
118
43
29 Number of Negative News.
30 % on This Type of
Neg.News
31
51,6
25
39
POLICY STATEMENTS
US ISM
(NAPM)
64
23,3
7 Number of News
8 % on Total Unsched. News
85
18,3
30
10,9
31 Number of News
32 % on Total Unsched. News
9 Number of Positive News.
10 % on This Type of Pos.News
35
41,1
14
46,6
33 Number of Positive News.
34 % on This Type of Pos.News
36
56,2
11 Number of Negative News.
12 % on This Type of Neg.News
50
58,8
16
53,3
35 Number of Negative News.
36 % on This Type of Neg.News
28
43,7
13 Number of News
14 % on Total Unsched. News
267
57,7
162
59,1
37 Number of News
38 % on Total Unsched. News
15 Number of Positive News.
16 % on This Type of Pos.News
120
44,9
87
53,7
39 Number of Positive News.
40 % on This Type of Pos.News
23
38,9
17 Number of Negative News.
18 % on This Type of Neg.News
147
55
75
46,2
41 Number of Negative News.
42 % on This Type of Neg.News
36
61
110
23,8
82
29,9
21 Number of Positive News.
22 % on This Type of Pos.News
76
69
55
67
23 Number of Negative News.
24 % on This Type of Neg.News
34
30,9
27
32,9
MARKET EVENTS
WEAK DOLLAR EVENTS
19 Number of News
20 % on Total Unsched. News
31
US GDP
59
21,5
TABLE 2.2 - EUROPEAN TZ: PERCENTAGE OF NEWS-CONCURRENT
RETURNS HIGHER THAN MEAN AND ONE ST.ERROR
ALL UNSCHEDULED NEWS
ALL SCHEDULED NEWS
All News
1 % Higher than Mean
2 % Higher than 1 St.Err.
73,8
42,2
All News
7 % Higher than Mean
8 % Higher than 1 St.Err.
61,6
23,3
Positive News
3 % Higher than Mean
4 % Higher than 1 St.Err.
71,8
39,3
Positive News
9 % Higher than Mean
10 % Higher than 1 St.Err.
51,7
20,6
Negative News
5 % Higher than Mean
6 % Higher than 1 St.Err.
75,7
45
Negative News
11 % Higher than Mean
12 % Higher than 1 St.Err.
70,9
25,8
POLICY STATEMENTS
MARKET EVENTS
Positive News
13 % Higher than Mean
14 % Higher than 1 St.Err.
65,7
34,2
Positive News.
17 % Higher than Mean
18 % Higher than 1 St.Err.
75
39,1
Negative News.
15 % Higher than Mean
16 % Higher than 1 St.Err.
74
52
Negative News.
19 % Higher than Mean
20 % Higher than 1 St.Err.
72,7
40,1
WEAK DOLLAR EVENTS
SCHEDULED NEWS:
GERMAN IFO
Positive News.
21 % Higher than Mean
22 % Higher than 1 St.Err.
71
39,4
Positive News.
25 % Higher than Mean
26 % Higher than 1 St.Err.
51,7
20,6
Negative News.
23 % Higher than Mean
24 % Higher than 1 St.Err.
91,1
55,8
Negative News.
27 % Higher than Mean
28 % Higher than 1 St.Err.
70,9
25,8
DISTRIBUTION OF UNCONDITIONAL RETURNS
AMERICAN TIME ZONE
EUROPEAN TIME ZONE
All E-$ Observations
29 % Higher than Mean
30 % Higher than 1 St.Err.
39,57
14,53
All E-$ Observations
35 % Higher than Mean
36 % Higher than 1 St.Err.
40,7
13,03
Positive E-$ Observations
31 % Higher than Mean
32 % Higher than 1 St.Err.
39,75
14,32
Positive E-$ Observations
37 % Higher than Mean
38 % Higher than 1 St.Err.
38,86
12,72
Negative E-$ Observations
33 % Higher than Mean
34 % Higher than 1 St.Err.
60,65
10,24
Negative E-$ Observations
39 % Higher than Mean
40 % Higher than 1 St.Err.
58,62
11,25
32
TABLE 2.3 - AMERICAN TZ: PERCENTAGE OF NEWS-CONCURRENT
RETURNS HIGHER THAN MEAN AND ONE ST.ERROR
ALL UNSCHEDULED
NEWS
ALL SCHEDULED NEWS
All News
1 % Higher than Mean
2 % Higher than 1 St.Err.
65,6
37,5
All News
7 % Higher than Mean
8 % Higher than 1 St.Err.
50
30,7
Positive News
3 % Higher than Mean
4 % Higher than 1 St.Err.
69,2
41,6
Positive News
9 % Higher than Mean
10 % Higher than 1 St.Err.
54,7
36,8
Negative News
5 % Higher than Mean
6 % Higher than 1 St.Err.
61
32,2
Negative News
11 % Higher than Mean
12 % Higher than 1 St.Err.
44,8
24,1
POLICY STATEMENTS
MARKET EVENTS
Positive News
13 % Higher than Mean
14 % Higher than 1 St.Err.
50
28,5
Positive News
17 % Higher than Mean
18 % Higher than 1 St.Err.
72,4
45,9
Negative News
15 % Higher than Mean
16 % Higher than 1 St.Err.
68,7
31,2
Negative News
19 % Higher than Mean
20 % Higher than 1 St.Err.
56
29,3
WEAK DOLLAR EVENTS
SCHEDULED NEWS
US PAYROLLS
Positive News
21 % Higher than Mean
22 % Higher than 1 St.Err.
67,2
36,3
Positive News
25 % Higher than Mean
26 % Higher than 1 St.Err.
61,5
43,5
Negative News
23 % Higher than Mean
24 % Higher than 1 St.Err.
70,3
40,7
Negative News
27 % Higher than Mean
28 % Higher than 1 St.Err.
40
24
SCHEDULED NEWS
US ISM (NAPM)
SCHEDULED NEWS
US GDP
Positive News
29 % Higher than Mean
30 % Higher than 1 St.Err.
50
33,3
Positive News
33 % Higher than Mean
34 % Higher than 1 St.Err.
47,8
30,4
Negative News
31 % Higher than Mean
32 % Higher than 1 St.Err.
46,4
28,5
Negative News
35 % Higher than Mean
36 % Higher than 1 St.Err.
47,2
22,2
33
TABLE 4.1 - SYMBOLS USED IN THIS SECTION
DEPENDENT VARIABLES
EUUSETZ
EUUSATZ
Delta-log of Euro-Dollar between 2PM and 10PM the previous day
Delta-log of Euro-Dollar between 10PM and 2PM
EXPLANATORY VARIABLES
FUNDETZ
EUUSATZ(t-1)
TEUB
TUSB
Fundamentals in ETZ
Euro-$ log-variation in ATZ in the previous day
Delta-log of 10-Year bond yield in Euro
Delta-log of 10-Year bond yield in US Dollar
SKETZ
GIFO
GIFOP
GIFON
Scheduled News in ETZ
German IFO: difference between actual and expected value
German IFO: positive difference between actual and expected value
German IFO: negative difference between actual and expected value
UNSKETZ
DEU
DEUP
DEUN
MEU
MEUP
MEUN
WEU
WEUP
WEUN
Unscheduled News in ETZ
Statements relevant for Euro-$ in ETZ
Euro-positive statements in ETZ
Euro-negative statements in ETZ
Market and policy news relevant for Euro-$ in ETZ
Euro-positive market and policy news in ETZ
Euro-negative market and policy news in ETZ
Events connected with $ weakness/strength in ETZ (see Section 2)
Euro-strengthening WEU events
Euro-weakening WEU events
FUNDATZ
EUUSETZ
TEUB
TUSB
DJ
Fundamentals in ATZ
Euro-$ log-variation in ETZ the same day
Delta-log of 10-Year bond yield in Euro
Delta-log of 10-Year bond yield in US Dollar
Delta-log of the Dow Jones Industrial Index
SKATZ
UOC
UOCP
UOCN
LPUNAPM
LNUNAPM
AVUNAPM
UGDP
UGDPP
UGDPN
LPGDP
LNGDP
AVGDP
US Non-farm payrolls: difference between actual and expected value
US Non-farm payrolls: positive difference between actual and expected value
US Non-farm payrolls: negative difference between actual and expected
value
US Non-farm payrolls: large positive surprises in UOC
US Non-farm payrolls: large negative surprises in UOC
US Non-farm payrolls: average surprises in UOC
US ISM Index (formerly NAPM): difference between actual and expected
value
US ISM Index (formerly NAPM): positive difference between actual and
expected value
US ISM Index (formerly NAPM): negative difference between actual and
expected value
US ISM Index (formerly NAPM): large positive surprises in UNAPM
US ISM Index (formerly NAPM): large negative surprises in UNAPM
US ISM Index (formerly NAPM): average surprises in UNAPM
US GDP growth: difference between actual and expected value
US GDP growth: positive difference between actual and expected value
US GDP growth: negative difference between actual and expected value
US GDP growth: large positive surprises in UGDP
US GDP growth: large negative surprises in UGDP
US GDP growth: average surprises in UGDP
UNSKATZ
DUS
DUSP
DUSN
MUS
MUSP
MUSN
WUS
WUSP
WUSN
Unscheduled News in ATZ
Statements relevant for Euro-$ in ATZ
Euro-positive statements in ATZ
Euro-negative statements in ATZ
Market and policy news relevant for Euro-$ in ATZ
Euro-positive market and policy news in ATZ
Euro-negative market and policy news in ATZ
Events connected with $ weakness/strength in ATZ (see paragraph 2)
Euro-strengthening WUS events
Euro-weakening WUS events
LPUOC
LNUOC
AVUOC
UNAPM
UNAPMP
UNAPMN
34
TABLE 4.2 - ATZ and ETZ ENTIRE PERIOD
ATZ - DEPENDENT VARIABLE EUUSATZ
RATIONAL MODEL
Equation N. 1
ETZ - DEPENDENT VARIABLE EUUSETZ
RATIONAL MODEL
Equation N. 1
R Bar**2 = 0.375
Durbin-Watson = 2.111
R bar**2 = 0.454
Durin-Watson = 1.90
Ljiung-Box Q-Statistics
Q(74-0) = 68.79
Ljiung-Box Q-Statistics
Q(74-0) = 98.43
Signif. Lev. 0.65
Signif. Lev. 0.03
Breusch-Pagan test
Chi-Squared(13) = 18.25 Signif. Lev. 0.15
Breusch-Pagan test
Chi-Squared(8) = 266.46 Signif. Lev.
VARIABLES
1. Constant
2. EUUSETZ
3. TEUB
4. TUSB{1}
5. DJ
6. DJ{1}
7. DJ{2}
8. UOC
9. UNAPM
10. UGDP
11. DUS
12. MUS
13. TWINN
14. WUS
Variables
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFO
6. DEU
7. MEU
8. IECBE
9. WEU
COEFF.
3.08E-04
-0.2268
-0.0427
0.0406
-0.1249
0.1308
-0.0435
-1.69E-05
-5.48E-04
-3.33E-03
6.09E-03
5.58E-03
0.019
5.41E-03
T-STAT
2.77
-9.23
-5.41
3.78
-13.58
12.52
-4.94
-3.7
-2.34
-3.73
18.5
7.5
4.68
11.93
COEFF.
-0.0005
-0.2132
-0.0495
0.0181
0.0015
0.0048
0.0052
0.0133
0.0058
0
T-STAT
-5.48
-10.95
-4.66
2.43
3.75
12.94
23.97
7.73
17.22
ATZ - DEPENDENT VARIABLE EUUSATZ
DYNAMIC MODEL
Equation N.2
ETZ - DEPENDENT VARIABLE EUUSETZ
DYNAMIC MODEL
Equation N.2
R Bar**2 = 0.374
Durbin-Watson = 2.108
R Bar**2 = 0.454
Durbin-Watson = 1.90
Ljiung-Box Q-Statistics
Q(74-0) = 72.2
Signif. Lev.
0.538
Ljiung-Box Q-Statistics
Q(74-0) = 97.32
Signif. Lev.
Breusch-Pagan test
Chi-Squared(24) = 35.58 Signif. Lev. 0.06
Breusch-Pagan test
Chi-Squared(20) = 288.22 Signif. Lev. 0.0
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. DJ
6. DJ{1}
7. DJ{2}
8. UOC
9. UOC{1}
10. UNAPM
11. UNAPM{1}
12. UGDP
13. UGDP{1}
14. GIFO
15. DUS
16. DUS{1}
17. MUS
18. MUS{1}
19. TWINN
20. WUS
21. WUS{1}
22. DEU
23. MEU
24. IECBE
25. WEU
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFO
6. GIFO{1}
7. UOC{1}
8. UNAPM{1}
9. UGDP{1}
10. DEU
11. DEU{1}
12. MEU
13. MEU{1}
14. IECBE
15. IECBE{1]
16. WEU
17. WEU{1}
18. DUS{1}
19. MUS{1}
20. WUS{1}
21. TWINN{1}
COEFF.
3.46E-04
-0.2232
-0.0426
0.0359
-0.1257
0.1336
-0.0441
-1.73E-05
9.40E-06
-5.74E-04
1.61E-04
-3.38E-03
9.55E-04
3.02E-04
6.04E-03
-9.76E-05
5.57E-03
-1.04E-03
0.019
5.58E-03
-4.95E-04
2.08E-04
-1.95E-04
-8.21E-04
-4.82E-04
T-STAT
3.05
-7.12
-5.4
3.26
-13.62
12.47
-4.96
-3.76
2.04
-2.42
0.68
-3.79
1.05
0.63
18.18
-0.29
7.35
-1.39
4.69
11.91
-1.05
0.69
-0.41
-0.39
-1.06
35
COEFF.
-5.10E-04
-0.2035
-0.0511
0.0185
1.49E-03
3.99E-04
2.61E-06
-1.65E-04
9.07E-04
4.89E-03
1.75E-06
5.33E-03
-1.73E-04
0.014
-1.95E-03
5.87E-03
-2.92E-04
-2.76E-04
-3.10E-04
9.39E-05
-5.99E-03
0.036
T-STAT
-5.32
-9.34
-4.79
2.45
3.68
0.98
0.66
-0.82
1.18
12.97
0
23.82
-0.79
7.81
-1.08
16.7
-0.83
-0.42
-1.03
0.22
-1.72
TABLE 4.3 - ETZ FIRST PERIOD - DEPENDENT VARIABLE EUUSETZ
RATIONAL MODEL
Equation N. 1
RATIONAL MODEL
Equation N. 2
FINAL MODEL
Equation N. 5
Robust Standard
Error Calculations
Robust Standard
Error Calculations
Robust Standard
Error Calculations
R Bar**2 = 0.419
Durbin-Watson = 1.844
R Bar**2 = 0.428
Durbin-Watson = 1.897
R Bar**2 = 0.439
Durbin-Watson = 1.903
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. LPGIFO
6. LNGIFO
7. AVGIFO
8. DEU
9. MEU
10. IECBE
COEFF.
-0.0006
-0.14
-0.0404
0.0095
0.0057
-0.0017
0.0025
0.0046
0.0049
0.0136
T-STAT
-3.89
-3.82
-2.38
0.54
5.91
-2.66
1.96
8.61
13.92
1.83
Variables
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFOP
6. GIFON
7. DEUN
8. DEUP
9. MEUN
10. MEUP
11. IECBE
DYNAMIC MODEL
Equation N. 3
DYNAMIC MODEL
Equation N. 4
Robust Standard
Error Calculations
Robust Standard
Error Calculations
R Bar**2 = 0.419
Durbin-Watson = 1.844
R Bar**2 = 0.423
Durbin-Watson = 1.892
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. LPGIFO
6. LPGIFO{1}
7. LNGIFO
8. LNGIFO{1}
9. AVGIFO
10. AVGIFO{1}
11. LPUOC{1}
12. LNUOC{1}
13. AVUOC{1}
14. LPUNAPM{1}
15. LNUNAPM{1}
16. AVUNAPM{1}
17. LPUGDP{1}
18. LNUGDP{1}
19. AVUGDP{1}
20. DEU
21. DEU{1}
22. MEU
23. MEU{1}
24. IECBE
25. IECBE{1}
26. DUS{1}
27. MUS{1}
COEFF.
-6.17E-04
-0.132
-0.0372
8.63E-04
5.58E-03
-5.94E-04
-1.69E-03
-2.07E-03
2.57E-03
-1.73E-03
1.43E-05
1.96E-06
3.76E-05
3.67E-04
2.01E-04
-5.51E-04
1.30E-03
-1.73E-03
-4.05E-03
4.69E-03
-2.58E-04
4.96E-03
-6.32E-05
0.0145
-1.47E-03
-9.20E-04
-2.10E-04
T-STAT
-3.73
-3.6
-2.21
0.04
6.39
-2.71
-2.69
-3.57
1.97
-0.83
2.03
0.38
2.39
1.48
0.21
-0.81
2.58
-1.57
-0.96
8.78
-0.52
13.7
-0.19
1.89
-0.5
-0.97
-0.36
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFOP
6. GIFOP{1}
7. GIFON
8. GIFON{1}
9. UOCP{1}
10. UOCN{1}
11. UNAPMP{1}
12. UNAPMN{1}
13. UGDPP{1}
14. UGDPN{1}
15. DEUN
16. DEUN{1}
17. DEUP
18. DEUP{1}
19. MEUN
20. MEUN{1}
21. MEUP
22. MEUP{1}
23. IECBE
24. IECBE{1}
25. DUSNE{1}
26. DUSP{1}
27. MUSNE{1}
28. MUSPE{1}
COEFF.
-0.001
-0.1336
-0.0361
0.0064
0.0048
-0.002
-0.0041
0.0051
-0.0037
0.0063
0.0137
T-STAT
-5.55
-3.66
-2.18
0.38
4.19
-3.54
-5.17
7.05
-8.91
10.21
1.83
COEFF.
-1.07E-03
-0.124
-0.0402
5.55E-03
4.90E-03
-1.17E-03
-1.89E-03
-1.30E-03
1.83E-05
-3.46E-06
4.18E-04
3.58E-04
4.03E-04
-1.74E-04
-4.26E-03
-3.16E-04
5.11E-03
-9.93E-04
-3.84E-03
4.87E-04
6.45E-03
2.23E-04
0.0141
-2.07E-03
6.74E-04
-2.11E-03
6.69E-04
2.66E-06
T-STAT
-4.91
-3.38
-2.44
0.31
4.22
-1.42
-3.53
-1.74
2.07
-0.6
1.81
0.67
0.29
-0.15
-5.43
-0.4
6.88
-1.87
-8.9
1.18
9.89
0.33
1.86
-0.65
0.53
-3.71
1.18
0
36
VARS
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFON
6. GIFON{1}
7. LPGIFO
8. LPGIFO{1}
9. UOCP{1}
10. LPUOC{1}
11. UNAPMP{1}
12. LPUGDP{1}
13. DEUN
14. DEUP
15. DEUP{1}
16. MEUN
17. MEUP
18. IECBE
19. DUSP{1}
COEFF. T-STAT
-0.001
-5.12
-0.1367
-3.77
-0.0337
-2.04
0.0033
0.19
-0.0019
-3.56
-0.0013
-1.81
0.0058
6.07
-0.0008
-4.89
0.0001
2.36
-0.0001
-2.2
0.0004
1.75
0.0013
3.7
-0.0044
-5.75
0.0051
7.01
-0.0011
-2.12
-0.0038
-8.73
0.0064
10.49
0.0137
1.82
-0.0018
-3.31
STAND.
COEFF.
-0.1493
-0.0886
0.0121
-0.0711
-0.0477
0.1687
-0.0218
0.3076
-0.2723
0.0317
0.0251
-0.1764
0.1706
-0.0372
-0.2513
0.3842
0.1579
-0.0378
TABLE 4.4 - ETZ SECOND PERIOD - DEPENDENT VARIABLE EUUSETZ
RATIONAL MODEL
Equation N. 1
RATIONAL MODEL
Equation N. 2
FINAL MODEL
Equation N. 5
Robust Standard
Error Calculation with Flat Window
and 4 Lags
Robust Standard
Error Calculation with Flat Window
and 4 Lags
Robust Standard
Error Calculation with Flat Window
and 4 Lags
R Bar**2 = 0.44
Durbin-Watson = 1.82
R Bar**2 = 0.443
Durbin-Watson = 1.83
R Bar**2 = 0.495
Durbin Watson = 1.856
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. LPGIFO
6. LNGIFO
7. AVGIFO
8. DEU
9. MEU
10. WEU
COEFF.
-0,0006
-0,251
-0,0393
0,0023
-0,0003
-0,0019
0,0041
0,0057
0,0065
0,007
T-STAT
-4,2
-4,66
-1,25
0,1
-0,29
-2,18
2,18
8,29
15,73
9,97
Variables
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFOP
6. GIFON
7. DEUN
8. DEUP
9. MEUN
10. MEUP
11. WEUN
12. WEUP
COEFF.
-0,0007
-0,2457
-0,0304
-0,0023
0,0002
-0,0023
-0,0073
0,0039
-0,0058
0,0073
-0,0049
0,0074
DYNAMIC MODEL
Equation N. 3
DYNAMIC MODEL
Equation N. 4
Robust Standard
Error Calculation with Flat Window
and 4 Lags
Robust Standard
Error Calculation with Flat Window
and 4 Lags
R Bar**2 = 0.473
Durbin-Watson = 1.834
R Bar**2 = 0.472
Durbin-Watson = 1.875
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. LPGIFO
6. LPGIFO{1}
7. LNGIFO
8. LNGIFO{1}
9. AVGIFO
10. AVGIFO{1}
11. LPUOC{1}
12. LNUOC{1}
13. AVUOC{1}
14. LPUNAPM{1}
15. LNUNAPM{1}
16. AVUNAPM{1}
17. LPUGDP{1}
18. LNUGDP{1}
19. AVUGDP{1}
20. DEU
21. DEU{1}
22. MEU
23. MEU{1}
24. WEU
25. WEU{1}
26. DUS{1}
27. MUS{1}
28. WUS{1}
COEFF.
-5,84E-04
-0,246
-0,033
1,67E-03
-3,42E-04
1,10E-04
-1,90E-03
-3,44E-04
4,41E-03
-1,18E-03
-8,94E-05
3,29E-07
-1,47E-06
-1,06E-03
5,61E-05
1,03E-03
1,69E-03
2,11E-04
9,29E-03
6,02E-03
1,81E-03
6,57E-03
-2,81E-04
6,76E-03
4,89E-04
-8,41E-04
-5,06E-04
-2,85E-04
T-STAT
-3,72
-4,07
-1,04
0,07
-0,38
0,26
-2,1
-0,23
2,42
-0,47
-38,05
0,04
-0,16
-1,02
0,29
2,86
2,84
0,31
3,06
8,69
1,81
16,27
-0,83
9,51
0,77
-0,25
-1,03
-0,27
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFOP
6. GIFOP{1}
7. GIFON
8. GIFON{1}
9. UOCP{1}
10. UOCN{1}
11. UNAPMP{1}
12. UNAPMN{1}
13. UGDPP{1}
14. UGDPN{1}
15. DEUN
16. DEUN{1}
17. DEUP
18. DEUP{1}
19. MEUN
20. MEUN{1}
21. MEUP
22. MEUP{1}
23. WEUN
24. WEUN{1}
25. WEUP
26. WEUP{1}
27. DUSNE{1}
28. MUSN{1}
29. MUSP{1}
30. WUSP{1}
COEFF.
-9,48E-04
-0,2237
-0,0365
3,23E-03
2,24E-04
1,29E-04
-2,22E-03
-1,08E-04
-6,73E-05
3,01E-06
-5,73E-04
5,24E-05
2,99E-03
-2,59E-03
-7,13E-03
-7,00E-04
4,45E-03
2,64E-03
-5,89E-03
6,77E-04
7,10E-03
2,32E-04
-4,23E-03
-3,78E-03
7,51E-03
-2,14E-04
1,29E-03
2,09E-03
6,74E-04
-3,61E-05
37
T-STAT
-4,02
-4,51
-0,96
-0,1
0,15
-2,51
-6,23
2,89
-12,52
10,38
-7,48
8,13
T-STAT
-4,76
-3,88
-1,17
0,15
0,21
0,31
-2,38
-0,09
-3,68
0,49
-0,62
0,25
2,94
-1,49
-6,03
-0,52
3,17
2,72
-12,7
1,69
9,3
0,42
-5,53
-1,8
8,54
-0,37
0,39
2,8
0,79
-0,03
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFON
6. LPUOC{1}
7. AVUNAPM{1}
8. UGDPP{1}
9. LPUGDP{1}
10. DEUN
11. DEUP
12. DEUP{1}
13. MEUN
14. MEUP
15. WEUN
16. WEUN{1}
17. WEUP
18. MUSN{1}
COEFF.
-9,17E-04
-0,2118
-0,0309
1,05E-03
-2,19E-03
-8,66E-05
8,03E-04
0,0116
-9,68E-03
-7,08E-03
4,28E-03
2,64E-03
-5,95E-03
7,18E-03
-5,17E-03
-3,87E-03
7,05E-03
2,20E-03
T-STAT
STAND.
-6,1
COEFF
-4,36
-0,2313
-1,01
-0,0812
0,05
0,0038
-2,38
-0,0799
-46,01
-0,1849
1,99
0,035
2,86
0,2584
-2,34
-0,1882
-5,96
-0,2849
3,15
0,1443
2,63
0,0891
-13,21
-0,3975
9,89
0,4306
-5,39
-0,1721
-1,85
-0,1286
7,9
0,3454
3,25
0,1074
TABLE 4.5 - ETZ THIRD PERIOD - DEPENDENT VARIABLE EUUSETZ
RATIONAL MODEL
Equation N. 1
RATIONAL MODEL
Equation N. 2
R Bar**2 = 0.587
Durbin-Watson 2.09
R Bar**2 = 0.59
Durbin-Watson
Ljung-Box Q-Statistics
Q(42-0) = 38.02
Signif. Lev. 0.646
Ljung-Box Q-Statistics
Q(42-0) = 32.46
FINAL MODEL
Equation N. 5
R Bar**2 = 0.601
Durbin-Watson
2,1
Signif. Lev. 0.855
Ljung-Box Q-S
Q(42-0) = 38.27
2,208
Significance Level = 0.6355
Breusch-Pagan Test
Chi-Squared(9) = 11.14 Signif. Lev. 0.266
Breusch-Pagan Test
Chi-Squared(11) = 14.176 Signif. Lev. 0.223
Breusch-Pagan
Chi-Squared(14)=19.65
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. LPGIFO
6. LNGIFO
7. AVGIFO
8. DEU
9. MEU
10. WEU
Variables
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFOP
6. GIFON
7. DEUN
8. DEUP
9. MEUN
10. MEUP
11. WEUN
12. WEUP
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. AVUNAPM{1}
6. DEUN
7. DEUP
8. MEUN
9. MEUP
10. MEUP{1}
11. WEUN
12. WEUP
13. WEUP{1}
14. DUSN{1}
15. WUS{1}
COEFF.
-0,0003
-0,2999
-0,081
0,0363
-0,0016
0,0002
-0,0008
0,0047
0,0046
0,0057
T-STAT
-2,27
-10,4
-5,59
4,14
-1,5
0,15
-0,78
6,79
12,63
18,02
DYNAMIC MODEL
Equation N. 3
R Bar**2 = 0.59
Durbin-Watson
Ljung-Box Q-Statistics
Q(42-0) = 42.92
COEFF.
-0,0002
-0,3081
-0,0786
0,0345
-0,0010
0,0009
-0,0047
0,0050
-0,0044
0,0050
-0,0066
0,0052
T-STAT
-1,27
-10,65
-5,36
3,91
-1,16
1
-5,49
4
-8,75
8,76
-12,07
12,93
DYNAMIC MODEL
Equation N. 4
R Bar**2 = 0.593
Durbin-Watson
2,19
Signif. Lev. 0.432
Ljung-Box Q-Statistics
Q(42-0) = 38.63
2,19
Signif. Lev. 0.62
Breusch-Pagan test
Chi-Squared(27) = 26.63 Signif. Lev. 0.484
Breusch-Pagan test
Chi-Squared(31) = 42.17 Signif. Lev.
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. LPGIFO
6. LPGIFO{1}
7. LNGIFO
8. LNGIFO{1}
9. AVGIFO
10. AVGIFO{1}
11. LPUOC{1}
12. LNUOC{1}
13. AVUOC{1}
14. LPUNAPM{1}
15. LNUNAPM{1}
16. AVUNAPM{1}
17. LPUGDP{1}
18. LNUGDP{1}
19. AVUGDP{1}
20. DEU
21. DEU{1}
22. MEU
23. MEU{1}
24. WEU
25. WEU{1}
26. DUS{1}
27. MUS{1}
28. WUS{1}
VARIABLES
1. Constant
2. EUUSATZ{1}
3. TEUB
4. TUSB{1}
5. GIFOP
6. GIFOP{1}
7. GIFON
8. GIFON{1}
9. UOCP{1}
10. UOCN{1}
11. UNAPMP{1}
12. UNAPMN{1}
13. UGDPP{1}
14. UGDPN{1}
15. DEUN
16. DEUN{1}
17. DEUP
18. DEUP{1}
19. MEUN
20. MEUN{1}
21. MEUP
22. MEUP{1}
23. WEUN
24. WEUN{1}
25. WEUP
26. WEUP{1}
27. DUSN{1}
28. DUSP{1}
29. MUSN{1}
30. MUSP{1}
31. WUSN{1}
32. WUSP{1}
COEFF.
-3,08E-04
-0,3555
-0,0873
0,0356
-1,72E-03
1,60E-03
3,91E-04
-1,25E-03
-9,48E-04
4,45E-04
-1,50E-05
-1,02E-05
8,77E-08
-6,81E-05
2,77E-04
-1,10E-03
4,56E-04
-2,22E-04
6,13E-04
4,78E-03
-8,06E-04
4,67E-03
-4,49E-04
5,69E-03
-7,91E-04
1,23E-03
2,16E-04
8,73E-04
T-STAT
-2,21
-9,86
-5,9
3,9
-1,58
1,48
0,26
-0,95
-0,97
0,45
-0,73
-1,28
0
-0,18
0,56
-1,7
0,19
-0,11
0,27
6,7
-1,1
12,63
-1,24
17,74
-2,5
1,67
0,45
2,25
COEFF.
-8,71E-05
-0,3549
-0,0817
0,0325
-1,22E-03
8,44E-04
9,76E-04
-1,18E-03
-1,93E-05
-5,16E-06
-2,08E-04
4,60E-04
3,25E-04
-2,83E-04
-4,52E-03
1,06E-03
5,38E-03
6,66E-05
-4,40E-03
-1,69E-05
4,98E-03
-9,73E-04
-6,59E-03
3,72E-04
5,21E-03
-9,75E-04
-2,31E-03
5,48E-04
7,58E-05
4,71E-04
-8,02E-04
7,84E-04
38
0,087
T-STAT
-0,4
-10,21
-5,48
3,57
-1,38
0,96
1
-1,27
-0,95
-0,83
-0,56
1,13
0,19
-0,16
-5,01
1,16
4,24
0,05
-8,63
-0,03
8,37
-1,61
-11,45
0,66
12,67
-2,31
-1,9
0,6
0,1
0,73
-1,25
1,65
COEFF.
-0,0001
-0,3496
-0,0821
0,032
-0,0011
-0,0043
0,0052
-0,0043
0,0051
-0,001
-0,0065
0,0052
-0,0011
-0,002
0,0007
Sign.Lev. =0.1416
T-STAT
STAND.
-0,29
COEFF
-11,06
-0,3818
-5,65
-0,2158
3,62
0,1173
-1,7
-0,0472
-4,98
-0,1726
4,25
0,1758
-8,84
-0,2905
9,01
0,3059
-1,74
-0,059
-11,79
-0,2154
12,96
0,2546
-2,65
-0,0522
-1,69
-0,0454
1,93
0,0363
TABLE 4.6 - ATZ FIRST PERIOD - DEPENDENT VARIABLE EUUSATZ
RATIONAL MODEL
Equation N. 1
RATIONAL MODEL
Equation N. 2
FINAL MODEL
Equation N. 5
R Bar**2 = 0.292
Durbin-Watson = 2.136
R Bar**2 = 0.288
Durbin-Watson = 2.135
R Bar**2 = 0.287
Durbin-Watson = 2.14
Ljung-Box Q-Statistics
Q(45-0) = 44.53
Signif. Lev. 0.492
Ljung-Box Q-Statistics
Q(45-0) = 42.57
Signif. Lev. 0.575
Ljung-Box Q-Statistics
Q(45-0) = 41.54 with significance level 0.619
Breusch-Pagan Test
Chi-Squared(17) = 11.97 Signf. Lev. 0.802
Breusch-Pagan Test
Chi-Squared(16) = 8.924 Signf. Lev. 0.916
Breusch-Pagan Test
Chi-Squared(12) =
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. LPUOC
9. LNUOC
10. AVUOC
11. LPUNAPM
12. LNUNAPM
13. AVUNAPM
14. LPUGDP
15. LNUGDP
16. AVUGDP
17. DUS
18. MUS
Variables
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UOCP
9. UOCN
10. UNAPMP
11. UNAPMN
12. UGDPP
13. UGDPN
14. MUSN
15. MUSP
16. DUSN
17. TWINN
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UNAPMN
9. UGDPP
10. MUSN
11. MUSP
12. DUSN
13. DUSP
COEFF.
1,23E-04
-0,2124
-0,0259
0,0395
-0,1522
0,1738
-0,0639
-1,84E-05
6,31E-06
-2,07E-05
-9,66E-04
2,07E-03
-2,33E-03
-2,99E-03
3,96E-04
-9,34E-03
6,11E-03
6,40E-03
T-STAT
0,6
-5,16
-1,37
2,11
-8,54
8,44
-3,73
-1,18
0,67
-1,04
-1,33
1,65
-2,31
-1,55
0,11
-2,79
4,67
11,12
DYNAMIC MODEL
Equation N. 3
DYNAMIC MODEL
Equation N. 4
R Bar**2 = 0.28
Durbin-Watson = 2.135
R Bar**2 = 0.279
Durbin-Watson = 2.128
Ljung-Box Q-Statistics
Q(45-0) = 48.74
Signif. Lev. 0.325
Breusch-Pagan test
Chi-Squared(33) = 21.89 Signif. Lev. 0.93
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. LPUOC
9. LPUOC{1}
10. LNUOC
11. LNUOC{1}
12. AVUOC
13. AVUOC{1}
14. LPUNAPM
15. LPUNAPM{1}
16. LNUNAPM
17. LNUNAPM{1}
18. AVUNAPM
19. AVUNAPM{1}
20. LPUGDP
21. LPUGDP{1}
22. LNUGDP
23. LNUGDP{1}
24. AVUGDP
25. AVUGDP{1}
26. LPGIFO
27. LNGIFO
28. AVGIFO
29. DUS
30. DUS{1}
31. MUS
32. MUS{1}
33. DEU
34. MEU
6,23E-05
-0,2131
-0,027
0,0428
-0,1509
0,1733
-0,0624
-1,80E-05
8,67E-06
7,32E-06
-2,85E-06
-1,76E-05
9,06E-06
-9,58E-04
-1,82E-04
2,11E-03
6,31E-04
-1,93E-03
-9,33E-04
-3,12E-03
1,07E-03
2,82E-04
3,53E-04
-9,33E-03
5,60E-03
7,68E-04
-1,90E-04
1,13E-03
6,39E-03
6,97E-04
6,29E-03
1,91E-04
-0,1582
-7,31E-04
3,23E-04
Ljung-Box Q-Statistics
Q(45-0) = 46.61
COEFF.
1,60E-04
-0,2068
-0,0234
0,0365
-0,1494
0,1741
-0,0636
-1,83E-05
8,53E-06
-1,02E-03
2,36E-03
-4,25E-03
2,31E-03
-6,33E-03
5,53E-03
-6,79E-03
6,03E-03
Signif. Lev. 0.406
Breusch-Pagan test
Chi-Squared(32) = 15.28 Signif. Lev.
0,29
-4,17
-1,38
2,21
-8,28
8,01
-3,49
-1,13
0,54
0,76
-0,3
-0,83
0,45
-1,24
-0,24
1,67
0,5
-1,65
-0,88
-1,6
0,51
0,07
0,09
-2,76
1,65
0,49
-0,13
0,58
4,68
0,52
10,52
0,31
-1,51
-1,08
0,67
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UOCP
9. UOCP{1}
10. UOCN
11. UOCN{1}
12. UNAPMP
13. UNAPMP{1}
14. UNAPMN
15. UNAPMN{1}
16. UGDPP
17. UGDPP{1}
18. UGDPN
19. UGDPN{1}
20. GIFOP
21. GIFON
22. DUSN
23. DUSN{1}
24. DUSP
25. DUSP{1}
26. MUSN
27. MUSN{1}
28. MUSP
29. MUSP{1}
30. DEUN
31. DEUP
32. MEUN
33. MEUP
T-STAT
0,71
-5,01
-1,24
1,98
-8,35
8,43
-3,71
-1,21
0,98
-1,46
2,88
-2,49
0,67
-3,88
2,47
-8,12
7,27
COEFF.
7,24E-05
-0,2124
-0,0252
0,0383
-0,1519
0,1741
-0,063
-1,74E-05
1,47E-05
1,01E-05
-1,90E-06
-1,18E-03
-8,79E-05
2,27E-03
8,58E-04
-4,47E-03
2,38E-03
2,25E-03
5,98E-04
1,19E-03
-1,05E-04
-7,03E-03
-1,56E-03
5,79E-03
-2,78E-04
-6,69E-03
-8,38E-05
6,17E-03
1,65E-04
1,35E-03
1,43E-04
-6,43E-04
2,41E-05
39
0,995
T-STAT
0,24
-4,12
-1,31
2,02
-8,31
8,02
-3,55
-1,12
0,94
1,13
-0,21
-1,6
-0,12
2,73
1,03
-2,58
1,32
0,65
0,17
0,85
-0,08
-4,1
-0,94
2,49
-0,12
-7,81
-0,09
7,17
0,19
1,5
0,14
-1,03
0,03
7,293 Sign.Lev. 0.838
COEFF.
0,0001
-0,2028
-0,0283
0,0389
-0,1491
0,1722
-0,0629
0,0024
-0,0042
-0,0068
0,006
-0,006
0,0056
T-STAT
STAND.
0,59
COEFF.
-4,91
-0,1857
-1,52
-0,0951
2,11
0,0936
-8,42
-0,4432
8,36
0,512
-3,68
-0,1869
2,95
0,1508
-2,46
-0,0856
-8,07
-0,3008
7,25
0,2862
-3,75
-0,1265
2,47
0,1093
TABLE 4.7 - ATZ SECOND PERIOD - DEPENDENT VARIABLE EUUSATZ
RATIONAL MODEL
Equation N. 1
Ljung-Box Q-Statistics
Q(40-0) = 40.157
Signif. Lev. 0.203
RATIONAL MODEL
Equation N. 2
FINAL MODEL
Equation N. 5
R Bar**2 = 0.418
Durbin-Watson = 2.158
R Bar**2 = 0.471
Durbin-Watson= 2.153
Ljung-Box Q-Statistics
Q(40-0) = 48.84
Signif. Lev. 0.159
Ljung-Box Q-Statistics
Q(40-0) = 39.14 with significance level 0.509
Breusch-Pagan Test
Chi-Squared(19) = 21.44 Signif. Lev. 0.313
Breusch-Pagan Test
Chi-Squared(17) = 21.404 Signif. Lev. 0.209
Breusch-Pagan Test
Chi-Squared(18)= 11.555
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. LPUOC
9. LNUOC
10. AVUOC
11. LPUNAPM
12. LNUNAPM
13. AVUNAPM
14. LPUGDP
15. LNUGDP
16. AVUGDP
17. DUS
18. MUS
19. TWINN
20. WUS
Variables
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UOCP
9. UOCN
10. UNAPMP
11. UNAPMN
12. UGDPP
13. UGDPN
14. MUSN
15. MUSP
16. DUSN
17. TWINN
18. WUSP
VARIABLES
COEFF.
1. Constant
0,0006
2. EUUSETZ
-0,2127
3. TUSB
-0,0588
4. TEUB
0,0915
5. DJ
-0,114
6. DJ{1}
0,1388
7. DJ{2}
-0,0365
8. UOCP
-3,89E-05
9. LPUOC{1}
9,24E-05
10. LPUNAPM{1} -0,0013
11. LNUNAPM{1} -0,0008
12. LNUGDP
0,0079
13. MUSN
-0,0061
14. MUSN{1}
0,0018
15. MUSP
0,0063
16. DUSN
-0,0069
17. TWINN
0,0189
18. WUSP
0,0048
19. DEUN
-0,0038
COEFF.
0,00060
-0,20630
-0,06310
0,09820
-0,11440
0,12400
-0,02570
0,00000
0,00000
0,00000
0,00020
0,00010
0,00110
-0,00190
0,00810
-0,00390
0,00670
0,00620
0,01890
0,00510
T-STAT
3,12
-4,91
-4,44
4,25
-7,38
6,91
-1,69
-1,82
-0,45
-1,38
0,35
0,27
1,28
-1,09
1,69
-1,01
2,48
11,54
4,9
3,68
DYNAMIC MODEL
Equation N. 3
DYNAMIC MODEL
Equation N. 4
R Bar**2 = 0.456
Durbin-Watson = 2.147
R Bar**2 = 0.455
Durbin-Watson = 2.149
Ljung-Box Q-Statistics
Q(40-0) = 43.32
Signif. Lev. 0.324
Ljung-Box Q-Statistics
Q(40-0) = 48.98
COEFF.
0,0007
-0,2049
-0,0581
0,0957
-0,1189
0,128
-0,025
-4,57E-05
8,44E-07
0,0007
0,0003
-0,0024
0,0054
-0,0064
0,0062
-0,0068
0,019
0,0048
Signif. Lev. 0.156
Breusch-Pagan test
Chi-Squared(37) = 26.29 Signif. Lev. 0.905
Breusch-Pagan test
Chi-Squared(35) = 29.84 Signif. Lev.
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. LPUOC
9. LPUOC{1}
10. LNUOC
11. LNUOC{1}
12. AVUOC
13. AVUOC{1}
14. LPUNAPM
15. LPUNAPM{1}
16. LNUNAPM
17. LNUNAPM{1}
18. AVUNAPM
19. AVUNAPM{1}
20. LPUGDP
21. LPUGDP{1}
22. LNUGDP
23. LNUGDP{1}
24. AVUGDP
25. AVUGDP{1}
26. LPGIFO
27. LNGIFO
28. AVGIFO
29. DUS
30. DUS{1}
31. MUS
32. MUS{1}
33. TWINN
34. WUS
35. WUS{1}
36. DEU
37. MEU
38. WEU
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UOCP
9. UOCP{1}
10. UOCN
11. UOCN{1}
12. UNAPMP
13. UNAPMP{1}
14. UNAPMN
15. UNAPMN{1}
16. UGDPP
17. UGDPP{1}
18. UGDPN
19. UGDPN{1}
20. GIFOP
21. GIFON
22. DUSN
23. DUSN{1}
24. MUSN
25. MUSN{1}
26. MUSP
27. MUSP{1}
28. TWINN
29. WUSP
30. WUSP{1}
31. DEUN
32. DEUPE
33. MEUN
34. MEUP
35. WEUN
36. WEUP
COEFF.
0,0401
-0,1579
-0,1937
0,2031
-0,3173
0,3893
-0,0967
-0,0028
0,0185
-0,0013
-0,0032
-0,0084
-0,0022
0,093
-0,2456
0,0091
-0,3435
0,208
-0,0598
-0,3657
-0,571
1,8117
0,1862
-0,7928
-0,0596
-0,0931
-0,0097
-0,4656
1,3175
-0,2626
1,2078
-0,1582
3,7374
1,0198
-0,2007
0,232
-0,0828
0,0293
T-STAT
1,02
-3,18
-4,12
3,61
-6,96
7,3
-2,15
-0,65
4,68
-0,54
-1,31
-2,65
-0,79
0,83
-2,28
0,08
-2,84
1,21
-0,34
-1,06
-1,61
1,96
0,18
-1,06
-0,07
-0,41
-0,05
-1,28
2,54
-0,5
11,59
-1,51
5,1
3,78
-0,72
1,13
-0,73
0,15
T-STAT
2,97
-4,9
-4,1
4,13
-7,73
7,17
-1,64
-2,51
0,08
1,3
0,62
-1,41
1,42
-7,94
8,25
-2,48
4,93
3,52
COEFF.
7,93E-04
-0,2104
-0,0602
0,0928
-0,1071
0,1348
-0,0339
-3,79E-05
6,88E-05
4,39E-06
-2,10E-06
8,23E-04
-1,28E-03
4,79E-04
-8,87E-04
-2,46E-03
-3,27E-03
5,46E-03
-2,49E-03
-7,64E-04
2,33E-04
-7,04E-03
1,34E-03
-6,00E-03
1,74E-03
6,12E-03
-8,88E-10
0,0188
4,70E-03
-5,95E-04
-3,94E-03
-1,12E-03
-6,07E-04
-6,61E-04
1,09E-03
4,92E-04
40
0,899
T-STAT
2,93
-3,85
-4,29
3,97
-7,03
7,57
-2,25
-2,05
3,86
0,42
-0,21
1,62
-2,59
0,93
-1,67
-1,47
-1,9
1,45
-0,64
-0,7
0,25
-2,66
0,5
-7,46
2,17
8,3
0
5,04
3,47
-0,42
-2,64
-0,77
-0,83
-0,81
0,4
0,47
Sign. Lev 0.869
T-STAT
3,01
-5,13
-4,35
4,1
-7,81
8,08
-2,52
-2,14
4,68
-2,39
-1,6
1,72
-7,89
2,39
8,82
-2,66
5,14
3,66
-2,62
STAND.
COEFF.
-0,1947
-0,1976
0,2202
-0,3391
0,4125
-0,1086
-0,0803
0,1805
-0,0818
-0,045
0,0925
-0,2721
0,0816
0,3001
-0,1456
0,1001
0,1843
-0,1381
TABLE 4.8 - ATZ THIRD PERIOD - DEPENDENT VARIABLE EUUSATZ
RATIONAL MODEL
Equation N. 1
RATIONAL MODEL
Equation N. 2
FINAL MODEL
Equation N. 5
R Bar**2 = 0.492
Durbin-Watson 2.103
R Bar**2 = 0.463
Durbin-Watson 2.061
R Bar**2 = 0.528
Durbin-Watson
Ljung-Box Q-Statistics
Q(42-) = 47.89
Signif. Lev.= 0.246
Breusch-Pagan Test
Chi-Squared(18) = 18.063
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. LPUOC
9. LNUOC
10. AVUOC
11. LPUNAPM
12. LNUNAPM
13. AVUNAPM
14. LPUGDP
15. LNUGDP
16. AVUGDP
17. DUS
18. MUS
19. WUS
Signif. Lev. 0.451
COEFF.
0,0001
-0,2477
-0,0355
0,0235
-0,1089
0,1024
-0,0391
0,0000
0,0000
-0,0001
-0,0003
0,0006
-0,0030
-0,0056
0,0003
-0,0042
0,0054
0,0055
0,0054
T-STAT
0,78
-5,44
-3,29
1,4
-7,43
6,37
-3
-0,33
-0,06
-6,52
-0,62
1,02
-3,61
-1,87
0,11
-1,49
5,93
9,68
12,33
Ljung-Box Q-Statistics
Q(42-0) = 48.265
Breusch-Pagan Test
Chi-Squared(18) = 58.53 Signif. Lev. 0
Variables
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UOCP
9. UOCN
10. UNAPMP
11. UNAPMN
12. UGDPP
13. UGDPN
14. MUSN
15. MUSP
16. DUSN
17. DUSP
18. WUSN
19. WUSP
DYNAMIC MODEL
Equation N. 3
DYNAMIC MODEL
Equation N. 4
R Bar**2 = 0.505
Durbin-Watson = 2.05
R Bar**2 = 0.476
Durbin-Watson= 2.007
Ljung-Box Q-Statistics
Q(42-0)= 49.34
Signif. Lev. 0.204
Signif. Lev. 0.234
Ljung-Box Q-Statistics
Q(42-0) = 52.65
COEFF.
4,28E-04
-0,2762
-0,0414
0,0207
-0,1116
0,1078
-0,0409
-1,20E-05
3,25E-05
-4,51E-04
1,25E-03
-4,97E-03
-8,50E-05
-5,39E-03
5,41E-03
-6,00E-03
5,15E-03
-7,10E-03
4,62E-03
Breusch-Pagan test
Chi-Sqaured(38) = 71.67 Signif. Lev.
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. LPUOC
9. LPUOC{1}
10. LNUOC
11. LNUOC{1}
12. AVUOC
13. AVUOC{1}
14. LPUNAPM
15. LPUNAPM{1}
16. LNUNAPM
17. LNUNAPM{1}
18. AVUNAPM
19. AVUNAPM{1}
20. LPUGDP
21. LPUGDP{1}
22. LNUGDP
23. LNUGDP{1}
24. AVUGDP
25. AVUGDP{1}
26. LPGIFO
27. LNGIFO
28. AVGIFO
29. DUS
30. DUS{1}
31. MUS
32. MUS{1}
33. WUS
34. WUS{1}
35. DEU
36. MEU
37. WEU
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. UOCP
9. UOCP{1}
10. UOCN
11. UOCN{1}
12. UNAPMP
13. UNAPMP{1}
14. UNAPMN
15. UNAPMN{1}
16. UGDPP
17. UGDPP{1}
18. UGDPN
19. UGDPN{1}
20. GIFOP
21. GIFON
22. DUSN
23. DUSN{1}
24. DUSP
25. DUSP{1}
26 MUSN
27. MUSN{1}
28. MUSP
29. MUSP{1}
30. WUSN
31. WUSN{1}
32. WUSP
33. WUSP{1}
34. DEUN
35. DEUP
36. MEUN
37. MEUP
38. WEUN
39. WEUP
COEFF.
0,0002
-0,1892
-0,0366
0,0089
-0,1071
0,1038
-0,0363
-7,15E-06
5,457E-05
4,81E-07
-1,98E-06
-7,94E-05
7,15E-07
-0,0003
0,0003
0,0002
-0,0013
-0,0029
0,0010
-0,0059
0,0014
0,0002
0,0020
-0,0058
0,0056
-0,0005
-0,0012
0,0015
0,0050
-0,0024
0,0055
-0,0001
0,0056
-0,0006
-9,24E-05
0,000
-0,001
T-STAT
1,14
-3,19
-3,38
0,51
-7,3
6,21
-2,74
-0,27
2,05
0,04
-0,19
-6,52
0,05
-0,57
0,55
0,19
-2,01
-3,51
1,16
-1,98
0,46
0,1
0,53
-1,99
1,96
-0,37
-0,58
1,18
5,36
-2,65
9,5
-0,2
12,38
-1,36
-0,09
-0,77
-1,76
T-STAT
1,99
-5,95
-3,75
1,2
-7,42
6,55
-3,05
-0,44
4,02
-0,94
2,31
-2,28
-0,03
-5,95
6,83
-3,92
4,33
-9,41
7,85
0,0004
COEFF.
T-STAT
7,53E-04
2,71
-0,2221
-3,65
-0,0424
-3,84
0,0142
0,78
-0,113
-7,51
0,1091
6,43
-0,0358
-2,63
-1,38E-05
-0,51
5,60E-05
2,03
3,42E-05
4,25
-1,64E-06
-0,19
-3,59E-04
-0,75
3,40E-04
0,7
1,54E-03
2,27
-1,02E-03
-1,89
-6,35E-03
-2,86
3,98E-03
1,79
1,84E-04
0,08
-3,20E-03
-1,1
6,89E-04
0,59
3,67E-04
0,27
-5,56E-03
-3,45
2,41E-03
1,54
4,57E-03
3,78
-2,27E-03
-1,93
-5,86E-03
-6,22
-1,60E-04
-0,17
5,33E-03
6,51
-1,76E-04
-0,21
-7,22E-03
-9,07
1,23E-03
1,53
4,65E-03
7,7
-3,94E-04
-0,66
-4,41E-04
-0,35
-2,78E-04
-0,16
-3,37E-04
-0,47
-6,64E-04
-0,76
-3,28E-04
-0,37
-1,66E-03
-2,63
41
Ljung-Box Q-Statistics
Q(42-0) = 51.79 Significance level 0.143
Breusch-Pagan Test
Chi-Squared(26) = 35.944
Signif. Lev. 0.126
Breusch-Pagan test
Chi-Squared(36) = 28.33 Signif. Lev. 0.815
2,041
VARIABLES
1. Constant
2. EUUSETZ
3. TUSB
4. TEUB
5. DJ
6. DJ{1}
7. DJ{2}
8. AVUOC
9. LPUOC
10. LPUOC{1}
11. AVUNAPM
12. LNUNAPM
13. LNUNAPM{1}
14. AVUGDP
15. AVUGDP{1}
16. LPUGDP
17. AVGIFO
18. DUSN
19. DUSN{1}
20. DUSP
21. DUSP{1}
22. MUSN
23. MUSP
24. WUSN
25. WUSN{1}
26. WUSP
27. WEUP
Signif. Lev. 0.0927
COEFF. T-STAT
0,0005
2,11
-0,2006
-4,23
-0,0378
-3,66
0,0146
0,89
-0,1084
-7,65
0,1041
6,63
-0,0369
-2,92
-8,17E-05
-6,87
-6,29E-06
-0,24
5,71E-05
2,17
-0,0028
-3,46
0,0005
0,87
-0,0013
-2,17
-0,0062
-2,13
0,0054
1,96
-0,0060
-2,09
0,0014
1,1
-0,0058
-4,02
0,0029
2,02
0,0047
4,1
-0,0021
-1,89
-0,0056
-6,52
0,0054
7,15
-0,0073 -10,21
0,0013
1,8
0,0044
7,86
-0,0013
-2,39
STAND.
COEFF.
-0,1837
-0,1271
0,0352
-0,3224
0,3096
-0,1097
-0,1989
-0,0123
0,1115
-0,1126
0,0285
-0,0712
-0,0683
0,0604
-0,1076
0,0306
-0,1216
0,0609
0,0916
-0,0414
-0,2497
0,2556
-0,2
0,0359
0,1709
-0,0598
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