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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

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University of Konstanz Gerald Schneider Christian Fahrholz November 17, 2006

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  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 • …

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