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. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22: 729–764, 2002