Investor reactions to news: a cognitive dissonance analysis of the euro-dollar exchange rate

This paper investigates whether the depreciation of the euro vis-à-vis the US dollar exchange rate during 2000 can be attributed to asymmetric investor reactions to economic and political news, including central bank statements. Daily euro-dollar exchange rate changes from April 1, 2000 through September 22, 2000 are regressed on economic and political news about the US and the euro area. The results suggest an asymmetry in the investors' response to news, depending on whether it comes from the US or the euro area. Moreover, investors react differently to 'good' and 'bad' news, which suggests cognitive dissonance reduction.