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Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data

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  • Cyril May
  • Greg Farrell
  • Jannie Rossouw
Abstract
This paper examines the temporal effect of domestic monetary policy surprises on both returns and volatility of returns of the South African rand/U.S. dollar exchange rate. The analysis in this “event study” proceeds using intra‐day minute‐by‐minute exchange rate data, repo rate data from the South African Reserve Bank's scheduled monetary policy announcements, and market consensus repo rate forecasts. A carefully selected sample over the period August 2003 to November 2017 ensures that the change in monetary policy is exogenous to the exchange rate. We find statistically and economically significant responses in intra‐day high‐frequency South African rand/U.S. dollar exchange rate returns and volatility of exchange rate returns to domestic interest rate surprises, but anticipated changes have no bearing on exchange rate returns and their volatility. The empirical results also indicate that there is an instantaneous response of the rand/dollar exchange rate to monetary policy surprises and that monetary policy news is an important determinant of the exchange rate until at least 42 minutes after the pronouncement – suggesting a high degree of market “efficiency” in its mechanical sense (although not necessarily in the deeper economic‐informational sense) in processing this information. Essentially, the asymmetric GARCH results exhibit no leverage effects – positive and negative information shocks have symmetric effects on conditional variance.

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  • Cyril May & Greg Farrell & Jannie Rossouw, 2018. "Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data," South African Journal of Economics, Economic Society of South Africa, vol. 86(3), pages 308-338, September.
    • Handle: RePEc:bla:sajeco:v:86:y:2018:i:3:p:308-338
    DOI: 10.1111/saje.12196
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    2. Matthew Greenwood-Nimmo & Daan Steenkamp & Rossouw van Jaarsveld, 2022. "CaninformationonthedistributionofZARreturnsbeusedtoimproveSARBsZARforecasts," Working Papers 11035, South African Reserve Bank.
    3. Munazza Jabeen & Abdul Rashid & Hajra Ihsan, 2022. "The news effects on exchange rate returns and volatility: Evidence from Pakistan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 745-769, January.

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