EUR/USD Exchange Rate Characterization: Study of Events

Round 1

Reviewer 1 Report

The paper is a sound, well written, piece of research. It is well written and explained. 

My only concern is that the authors incorrectly describe the significance of their results. They claim to have found 'abnormal returns' from their events. They state that 'normal returns' can be classified as no event occurring, and there any FX change from an event is 'abnormal'.  

This is incorrect, as as a normal return would be better described as a change in the FX rate appropriate to the interest rate change based on whatever stable state theory the author choose. Any deviation in the FX rate from that normal change would then be abnormal. 

Once this is clarified by the authors in the intro, methods, results, and conclusion, the paper would be acceptable.

Author Response

Dear referee, we thank you in advance for all your recommendations.

Q1) Authors incorrectly describe the significance of their results

A1) We clarify in the intro, methods, results, and conclusion and we consider as a normal return the change in the FX rate appropriate to the change of interest rate and not as abnormal.

Reviewer 2 Report

The paper aims to test ECB and Federal reserve announcement effects on EUR/USD return rates.

Main comments:

(1) The paper needs to be better motivated and indicate clearly the gap in knowledge it is aiming to fill. Discuss carefully related literature and indicate the gap in knowledge this paper aims to fill.

(2) Economic discussion of the announcement must be elaborated.  The authors should discuss the content of announcements, their anticipated effects, and to what extend the announcements are  surprises to the markets.

(3) If the announcements are something related to quantitative changes (e.g. interest rates), it could be helpful to consider marginal effects on the exchange rate return effects.

Minor comments:

The reporting style is immature by being more like student course work rather that professional journal type writing.

Author Response

Dear referee, we thank you in advance for all your recommendations.

Main comments:

(1) The paper needs to be better motivated and clearly indicate the gap in knowledge it is aiming to fill. Discuss carefully related literature and indicate the gap in knowledge this paper aims to fill.

A: Done

(2) Economic discussion of the announcement must be elaborated.  The authors should discuss the content of announcements, their anticipated effects, and to what extend the announcements are surprises to the markets.

A: Done

(3) If the announcements are something related to quantitative changes (e.g., interest rates), it could be helpful to consider marginal effects on the exchange rate return effects.

A: We don't have information about marginal effects.

Reviewer 3 Report

·         The abstract should be extended as to show more the new results and the author’s contribution to the science.

·         What is the scientific contribution of your study? The author/s need to do a better job of situating this work in the existing literature and clearly stating the paper’s novel contribution to that literature.

·         At the end of the introduction, it is necessary to give a brief overview of the structure of the paper.

·         Defining research hypotheses and research questions is not the subject of the methodological part but of the introduction.

·         In the conclusion of the paper, it is necessary to connect obtained results with the main aim of the research and the main hypotheses/research questions.

·         Discuss on both theoretical and practical implications of the study.

·         What are the main limitations of your research that need to be considered when interpreting the results obtained and making conclusions?

·         It would be interesting to mention the suggestions for future research in terms of new scientific contributions.

Author Response

Dear referee, we thank you in advance for all your recommendations.

The abstract should be extended as to show more the new results and the author’s contribution to the science.

Done

• What is the scientific contribution of your study? The author/s need to do a better job of situating this work in the existing literature and clearly stating the paper’s novel contribution to that literature.

Done

• At the end of the introduction, it is necessary to give a brief overview of the structure of the paper.

Done

• Defining research hypotheses and research questions is not the subject of the methodological part but of the introduction.

Done

• In the conclusion of the paper, it is necessary to connect obtained results with the main aim of the research and the main hypotheses/research questions.

We include in the paper:

“This study allows us to conclude that there is a significant impact of changes in US and Euro Zone interest rates on the EUR/USD exchange rate, although the results are discrepant in terms of the exchange rate fluctuation pattern. Therefore, there is no specific correlation, but in turn, there is a greater probability that a given movement in the EUR/USD exchange will occur, Apergis et al. (2012) claims that both central banks, the European Central Bank and the American Federal Reserve, can influence the EUR/USD exchange rate by adjusting their monetary policies and changing interest rates. The results found are also in agreement with the studies by Clostermann and Schnatz (2000), Maeso-Fernandez et al. (2001), and Aalquist and Chinn (2002) who identified that GDP, fiscal deficits, oil prices and interest rates are macroeconomic indicators that influence the EUR/USD exchange rate. On the other hand, Engel, et al. (2007), and Molodtsova and Papell (2009), concluded that macroeconomic news helped to understand the direction of exchange rates, something that was not possible to observe with the results obtained in this study.

According to the results found in this study, it appears that the abnormal returns for ,  and  are statistically significant in 50%, 41,67% and 16,67% of the events, in this order. Thus, there is a decrease in the significance of the results, so that the impact of interest rates changes by central banks has a more immediate effect over time. This analysis is in line with the result obtained by Nikkinen and Vahamaa (2009), in which they state that central bank interventions temporarily increase the implicit correlations in the EUR/USD, JPY/USD and GBP/USD exchange rates, since correlations are more significant on the first day of intervention, and decline on the following days, that is, central banks actions are more effective in the short term. These results are also consistent with the studies by Chaboud and Humpage (2005), and Kearns and Rigobon (2005).”

• What are the main limitations of your research that need to be considered when interpreting the results obtained and making conclusions?

We include in the paper:

“According to Róias (2018), the event study methodology depends on the assumption of an efficient market, and this assumption is not valid in several situations.”

“The identification of the estimation window and the event window in a subjective way gives rise to different results, and in this study an estimation window with 300 days was applied because it was the window that gave the best results”

“Finally, since it is not possible to consider only the interest rate change effect on the EUR/USD exchange rate may harm or strengthen the obtained results, as changes in interest rates do not only occur when the central banks intervene. There are also other macroeconomic indicators that are communicated, as well as other changes in the monetary policy of some economy. However, despite the mentioned limitations, the event study methodology is often used in research, as it can detect abnormal returns through a simple model”

• It would be interesting to mention the suggestions for future research in terms of new scientific contributions.

Done

Round 2

Reviewer 2 Report

The authors say that they do not have information about the marginal effect of the events. Of course this information is not available unless analyzed properly. These effect can be obtained using standard regression in which the dependent variable is the change in the currency rate and explanatory variables are constructed appropriately from the event variables. Regression is a rich modeling technique!

Otherwise I do not have any more major comments.

Minor comments:

Reporting of Table 2 and the content of Table 2 do not match.

Author Response

Thank you for the information. We include in the paper the sentence: "Given that the work produced serves to report and study the evolution of the EUR/USD exchange rate to the interest rate variations that actually occurred, it is proposed that, for future investigations, the marginal effects on the exchange rate returns are studied using linear regression."

Reviewer 3 Report

-

Author Response

Thank you for the report. We worked on the paper in order to improve it, and in order to answer to each of the suggested observations.