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Effect of sanctions on currency pair

gogy_tkd

gogy_tkd

Joined
7/5/12
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I am writing now my master thesis on topic impact of western sanctions on currency pairs EUR/RUB and USD/RUB and I need help with emperical part. I would like to prove following thesis:

(1) Whether is Russian ruble sensitive to sanctions announcements? and (2)Do sanctions announcements have stronger impact on Russian ruble than macroeconomic announcements of GDP and CPI in recent period?

Problem is I don't know how to emperically prove that as I would like to do it as event study so basically several days prior event and several days after event and my main event is 28.7.2014 when west imposed very strict sanctions. I was thinking do it in a way just to check daily return and volatility before event and after event and compare it with normal non-annoucements daily return and volatility, but problem is how to isolate only sanctions effect as some other variables might cause price movements. On the other hand if I use Cummalitve abnormal returns like for earnings annoucments in stocks what is than the expected return of currency pair how to compute that, as for stock it's quite easier. Another problem with sanctions is as they dont have exact time annoucments like for example CPI which is lets say 16:00 GMT on particular date.

Here is one example about macroeconomic news impact on bond prices:
https://www2.bc.edu/~balduzzp/article15.pdf

Here is about sanctions news
http://www.bakermckenzie.com/sanctionsnews/

Here is example how they analyze it at stock market
http://www.brunel.ac.uk/__data/assets/pdf_file/0016/82141/0940.pdf

What is your advise how to approach the empirical part of research?

best regards
 
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(1) Yes, definitely. Just look at what happened to the currencies when the sanctions were announced. (2) It's not a question of whether sanctions impact more or less than macro data. Sanctions impact the macro data directly. For example, anyone in Russia will tell you food prices have gone through the roof since sanctions (and reverse sanctions) hit. Russia imports a huge amount of produce and foreign food products generally - and now they can't. CPI is increasing. The inability to trade with normal trading partners is going to impact GDP - that is pretty self evident. To rephrase, this means that sanctions impact the expectation of future CPI, GDP, and other variables, which weakens the currency - and so when the data points actually come out, there isn't as much of a market move upon their release. But to then draw the conclusion that they matter less than sanctions would be missing the point. Additionally, the fear of further sanctions and/or more stringent capital controls means people pull their money out of Russia, which also weakens the currency.
 
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What do you think might be better set 2nd hypothesis ? Problem with 1st one, yes it is very logical as I am currency trader myself, and it is obvious on EUR/RUB and USD/RUB charts you can see, it is very senstive to sanctions, but I have to academically prove it like an event study, and I think I will do it same way as in this article https://www2.bc.edu/~balduzzp/article15.pdf. So I take event window -5 to +5 days of event and I will just compare daily return and volatility in sanction period with average non-saction and other big annoucments period.

Thank you for your help I am really stuck with writting of master thesis proposal :)
 
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