Risk-return relationships in foreign-currency futures following macroeconomic announcements

This study uses the tick data for foreign-currency futures to examine risk-return relationships on macroeconomic announcements. This study different from previous studies-examines the risk-return relationship by capturing the announcement effect on returns with announcement Surprises and on volatilities with announcement dummies simultaneously in a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. Strong risk-return relationships are detected for the first min after the announcements. Furthermore, the return-risk tradeoff ratios differ across currencies and across macroeconomic indicators. The same information can be more profitable when acted on the more liquid currency futures. (C) 2002 Wiley Periodicals, Inc.