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Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction
Author:
Mr. Barry J. Eichengreen null

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Romain Lafarguette
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Arnaud Mehl null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 091
Language:
English
Publication Date:
07 Apr 2017
DOI:
https://doi.org/10.5089/9781475593488.001
ISBN:
9781475593488
ISSN:
1018-5941
Pages:
37
Keywords:
WP; interest rate; submarine cable; Technology; Submarine Fiber-Optic Cables; Foreign Exchange Market; Macro Announcements; cable connection; standard deviation; S&P 500; currencies of country; fiber optic cable; trading strategy; market participant; policy news; cable network; market reaction; trading location; policy interest rate news; Central bank policy rate; Currencies; Exchange rates; Currency markets; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We study the impact of technology on the reaction of financial markets to information, focusing on the foreign exchange market. We contrast the “thin-skinned” view that technological improvements cause markets to react more to new information with the “thick-skinned” view that they react less. We pinpoint exogenous technological changes using the timing of the connection of countries via the submarine fiber-optic cables used for electronic trading. Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned” hypothesis. This is in line with the view that technology eases access to information and reduces trend-following behavior. According to our estimates, cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund