Sources of meteor showers and heat waves in the foreign exchange market

We examine the role that news and heterogeneous expectations play in the persistence of exchange rate volatility, or so-called ‘meteor shower’ effects. Our empirical focus is on the U.S. trade balance news, which is shown to have a significant and persisting effect on the exchange rate and its conditional variance. Furthermore, the impact of U.S. trade balance ‘news’ is not isolated to the U.S. foreign exchange market. The degree to which U.S. trade balance ‘news’ affects other geographical market locations is functionally related to heterogeneous priors.