| This paper is organized around two questions: whether transactions are induced by macroeconomic news and whether these induced transactions have an effect on exchange rate volatility. In other words, I jointly test in this paper (1) whether macro news flow increases order flow volatility and exchange rate volatility (2) to what extent can the foregoing channel be compared to the direct channel. The answer to both questions is positive: using daily data, order flow is considerably more volatile when macro news is flowing, and these signed orders have the theoretically predicted effects on the exchange rate's direction. Induced order flow accounts for two-thirds of news' total price effect, with direct news effects accounting for one-third. In terms of total exchange rate variation, the order flow channel brings news' explanatory power up to approximately 30 percent, which is greater than estimates in the existing literature, conducive to resolving the puzzle of missing news effects. |
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