Abstract
This paper studies the impact of trading and market liquidity on exchange rates surrounding the release of macroeconomic news. Our results show a significant increase in the informational role of trading and a significant reduction in market liquidity following macroeconomic announcements. The findings suggest that releases of public information increase the level of information asymmetry and discourage the participation of discretionary liquidity traders in the foreign exchange market. The results highlight the importance of price discovery in understanding the behavior of exchange rates and market liquidity.
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