1 / 10

University of Konstanz Gerald Schneider Christian Fahrholz November 17, 2006

Your words are in my purse! The impact of EU summits on Euro-Dollar exchange rate. University of Konstanz Gerald Schneider Christian Fahrholz November 17, 2006. Structure. Research Question Research Design GARCH analysis on volatility Event study on abnormal returns Empirical Results

joshua-justice
Download Presentation

University of Konstanz Gerald Schneider Christian Fahrholz November 17, 2006

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Your words are in my purse!The impact of EU summits onEuro-Dollar exchange rate University of Konstanz Gerald Schneider Christian Fahrholz November 17, 2006

  2. Structure • Research Question • Research Design • GARCH analysis on volatility • Event study on abnormal returns • Empirical Results • Outlook

  3. Research Question Research Question • Do political events such as European Council meetings significantly affect returns on Euro-Dollar exchange rates? • Do international investors, i.e. the forex market, attach importance to EU summits? Approach • Euro-Dollar exchange rate 1999-2005(daily frequency) • Financial econometrics on level and volatility effects in exchange-rate series

  4. Political Event Investor Expectations Market Prices/ Exchange Rate EU Summit Level of Returns Election Volatility of Returns Referendum Interrelation of Politics and Forex Market

  5. Research Design • GARCH analysis on volatility effects of EU Council meetings • Is the class of EU summits a structural component in Euro-Dollar exchange rate variance? • Portfolio-market model as benchmark Event Data Methodology Event Study • Do individual summits exert significant influence? • Here: Examining possible level effects in the exchange-rate series

  6. GARCH Analysis: Input Endogenous Variable • First-differenced log Euro-Dollar exchange rate • Autoregressive GARCH model • 1812 observations • BOND: return on 10 Y US-Bonds (Treasuries) • USSTOCK: return on Dow Jones Index (first lag) • EURSTOCK: return on STOXX 50 • AR(1): lagged dependent variable Exogenous Variables(economics) • SUM: 27 European Council meetings with alternative event window sizes • REF: 7 referenda on European matters • ELECT: 49 elections Exogenous Variables(politics)

  7. GARCH Analysis: Output

  8. Event Study: Input • Generating expected returns for event windows,i.e. periods in which an EU summit occurs, with the help of an estimation window (OLS) • Difference between expected and actual return in an event window is the ‚politically induced abnormal return‘ • Cumulating and t-test at 5%-significance level Cumulative Abnormal Returns Event- and Estimation Window • Dummy-Regression • 4 different event windows comprising 3-5 days

  9. Event Study: Output

  10. Results • Empirical evidence for international investors reacting to European political events such as EU Council meetings • This applies to both volatility and level effects • Hence, international investors seem to behave moreEuropean than Europeans Result Future Research • …

More Related