An Empirical Investigation of the News Effect on the Pound Euro Exchange Rate

The exchange rate is highly volatile. The high volatility of exchange rate affects the economy and daily lives. So there is a need to predict this highly fluctuating exchange rate to facilitate the economic policy decision-making. There are various ways to predict the exchange rate. One of the ways to predict the exchange rate is by forward rate. Empirical researches done by Bilson(1978), Fama (1984), Gregory and Mc Curdy (1984), Sephton and Larsen (1991), Corbae et al (1992)and Longworth (1981) suggcst that foreign exchange market is inefficient and Forward Rate (F) is not a good predictor of the Future Spot Rate (S). Infact empirical researches found that there is a gap between the F and S and the gap is due to unexpected change in the Macro Economic variables like "News". There is a lot of researches done by Frenkel (1981), Edwards (1982), Copeland (1984), Macdonald (1985 & 1983). Bomhoff and Korte'*,eg ( 1983) & Napolitano (2000) to predict the exchange rate by News model. But except Napolitano all of the above mentioned have done researches on exchange rates other than Pound Euro exchange rates as Euro didn't exist during that time. Napolitano has done research on the News effect on the Pound Euro exchange rate. But he has included onlv interest rate news effect and has done his research based on daily data of I year. The difference between the Nepolitano research and this research is the inclusion of the inflationary etfect on tlre exchange rate. Also there is a difference in the data considered in this research compared to that of Nepoliano research. This research considered 10 year quarterly data that is different compared to the Nepolitano research. The purpose of the present research is to see whether the prediction of S by F becomes strong when the News effect is considered.