'Once-in-a-generation' yen volatility in 1998: fundamentals, intervention, and order flow

The dramatic yen/dollar volatility of 1998 has been popularly ascribed to order how driven by changing tastes for risk and hedge-fund herding on unwinding yen 'carry trade' positions rather than fundamentals. High-frequency evidence of shifting fundamentals is provided by a comprehensive list of macroeconomic announcements. News is found to have significant effects on volatility, but order flow may play a more important role. Since portfolio shifts are revealed to the market through trading, the results are consistent with order flow playing a significant role in the revelation of private information and associated exchange rate shifts. (C) 2001 Elsevier Science Ltd. All rights reserved.