Skip to main content
SpringerLink
Log in

Central bank communication and correlation between financial markets: Canada and the United States

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

We study the correlation between pairs of bond and stock markets in Canada and the United States between January 1998 and December 2009 in the framework of diagonal-BEKK models. Our research question is whether monetary policy actions and communications by the Bank of Canada and the Federal Reserve significantly affect the conditional co-movement of financial markets (i) within Canada and (ii) between Canada and the United States. We find that central bank communication significantly increases the correlation of financial markets within and across the two countries and is particularly important for the correlation of Canadian and US long-term interest rates.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Note that our analysis employs a subset of the Hayo et al. (2008) dataset, as we exclude speeches by regional presidents. Previous studies show that speeches by regional presidents do not affect US (Hayo et al. 2008) or Canadian (Hayo and Neuenkirch 2012) financial markets to any substantial degree.

  2. Bloomberg surveys are used to identify surprises that occur during scheduled meetings. For instance, a ‘surprise hike’ can be (i) an unexpected rise in the target rate or (ii) an unchanged target rate when a rate cut was expected. Intermeeting moves are naturally classified as surprises.

  3. Advance gross domestic product, industrial production, and trade balance to capture the business cycle phase; the Institute for Supply Management manufacturing index and the Conference Board consumer confidence rating for producer and consumer confidence; housing starts for real estate effects; nonfarm payroll and the unemployment rate to proxy labour market conditions; retail sales for actual consumption; and the consumer price index and producer price index for inflation.

  4. Real GDP, capacity utilisation rate, current account, and merchandise trade balance to control for business cycle; the Ivey Purchasing Managers Index for producer confidence; housing starts for real estate markets; net change in employment and the unemployment rate to proxy labour market conditions; retail sales for actual consumption; and the consumer price index, industrial product price index, and raw materials price index for inflation.

  5. All our estimated models are stationary, as the following condition is always fulfilled: a 211 + b 211 < 1.

  6. The hypothesis of constant conditional correlations can be rejected (Engle and Sheppard 2001).

  7. To that end, we regress the univariate financial market returns on all variables of interest and use the residuals as filtered series.

  8. Note that estimation of a model covering the whole sample period and including interaction terms for the financial crisis subsample is not feasible within our framework.

  9. Estimation of nested models including lead, contemporaneous, and lagged effects leads to severe convergence problems and is not feasible.

  10. Tables 5, 6, 7, 8, 9, 10, 11, and 12 in the Appendix provide detailed regression estimates.

References

  • Ayuso J, Blanco R (2001) Has financial market integration increased during the nineties? J Int Financ Mark Inst Money 11:265–287

    Article  Google Scholar 

  • Bauwens L, Laurent S, Rombouts JVK (2006) Multivariate GARCH-models: a survey. J Appl Econ 21:79–109

    Article  Google Scholar 

  • Bessler DA, Yang J (2003) The structure of interdependence in international stock markets. J Int Money Finance 22:261–287

    Article  Google Scholar 

  • Blinder A, Ehrmann M, Fratzscher M, de Haan J, Jansen D-J (2008) Central bank communication and monetary policy: a survey of theory and evidence. J Econ Lit 46:910–945

    Article  Google Scholar 

  • Bollerslev T (1990) Modelling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH model. Rev Econ Stat 72:498–505

    Article  Google Scholar 

  • Chen G-M, Firth M, Rui OM (2002) Stock market linkages: evidence from Latin America. J Bank Financ 26:1113–1141

    Article  Google Scholar 

  • Doukas J, Switzer L (2004) Bi-national news effects and exchange rate futures: the case of Canadian dollar futures contracts. EFMA 2004 Basel Meetings Paper

  • Ehrmann M, Fratzscher M (2007) Communication by central bank committee members: different strategies, same effectiveness? J Money, Credit, Bank 39:509–541

    Article  Google Scholar 

  • Engle RF (2002) Dynamic conditional correlations—a simple class of multivariate GARCH models. J Bus Econ Stat 20:339–350

    Article  Google Scholar 

  • Engle RF, Kroner KF (1995) Multivariate simultaneous generalized ARCH. Econ Theory 11:122–150

    Article  Google Scholar 

  • Engle RF, Sheppard K (2001) Theoretical and empirical properties of dynamic conditional correlation multivariate GARCH. NBER Working Paper 8554, October

  • Gravelle T, Moessner R (2001) Reactions of Canadian interest rates to macroeconomic announcements: implications for monetary policy transparency. Bank of Canada Working Paper 2001–5

  • Hayo B, Neuenkirch M (2012) Domestic or U.S. news: what drives Canadian financial markets? Econ Inq 51:690–706

    Article  Google Scholar 

  • Hayo B, Kutan AM, Neuenkirch M (2008) Financial market reaction to federal reserve communications: does the crisis make a difference? MAGKS Discussion Paper No. 08-2008

  • Hayo B, Kutan AM, Neuenkirch M (2010) The impact of U.S. central bank communication on European and pacific equity markets. Econ Lett 108:172–174

    Article  Google Scholar 

  • Ielpo F, Guégan D (2009) Further evidence on the impact of economic news on interest rates. Front Finance Econ 6:1–45

    Google Scholar 

  • Kim SJ, Moshirian F, Wu E (2005) Dynamic stock market integration driven by the European monetary union: an empirical analysis. J Bank Financ 29:2475–2502

    Article  Google Scholar 

  • Kohn DL, Sack BP (2004) Central bank talk: does it matter and why? In: Macroeconomics, monetary policy, and financial stability. Bank of Canada, Ottawa, pp 175–206

    Google Scholar 

  • Tse YK, Tsui AKC (2002) A multivariate generalized autoregressive conditional heteroscedasticity model with time-varying correlations. J Bus Econ Stat 20:351–362

    Article  Google Scholar 

  • Van der Weide R (2002) GO-GARCH: multivariate generalized orthogonal GARCH model. J Appl Econ 17:549–564

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Faculty of Business Administration and Economics, Philipps-University Marburg, 35032, Marburg, Germany

    Melanie-Kristin Beck, Bernd Hayo & Matthias Neuenkirch

Authors
  1. Melanie-Kristin Beck
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bernd Hayo
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Matthias Neuenkirch
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Matthias Neuenkirch.

Appendix

Appendix

Fig. 1
figure 1

Change in conditional correlation: 6-month vs. 10-year Canadian yields. Note: Figure plots the difference in conditional correlations between a model employing (i) the full sample period and contemporaneous explanatory variables and (ii) a model without any explanatory variables

Full size image
Fig. 2
figure 2

Change in conditional correlation: 10-year Canadian yields vs. TSX. Note: Figure plots the difference in conditional correlations between a model employing (i) the full sample period and contemporaneous explanatory variables and (ii) a model without any explanatory variables

Full size image
Fig. 3
figure 3

Change in conditional correlation: TSX vs. S&P 500. Note: Figure plots the difference in conditional correlations between a model employing (i) the full sample period and contemporaneous explanatory variables and (ii) a model without any explanatory variables

Full size image
Fig. 4
figure 4

Change in conditional correlation: 10-year yields Canada vs. US. Note: Figure plots the difference in conditional correlations between a model employing (i) the full sample period and contemporaneous explanatory variables and (ii) a model without any explanatory variables

Full size image
Table 5 Estimating bivariate financial market correlations: 6-month vs. 10-year Canadian yields
Full size table
Table 6 6-month vs. 10-year Canadian yields: financial crisis
Full size table
Table 7 Estimating bivariate financial market correlations: 10-year Canadian yields vs. TSX
Full size table
Table 8 10-year Canadian yields vs. TSX: financial crisis
Full size table
Table 9 Estimating bivariate financial market correlations: TSX vs. S&P 500
Full size table
Table 10 TSX vs. S&P 500: financial crisis
Full size table
Table 11 Estimating bivariate financial market correlations: 10-year yields Canada vs. US
Full size table
Table 12 10-year yields Canada vs. US: financial crisis
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Beck, MK., Hayo, B. & Neuenkirch, M. Central bank communication and correlation between financial markets: Canada and the United States. Int Econ Econ Policy 10, 277–296 (2013). https://doi.org/10.1007/s10368-012-0211-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-012-0211-x

Keywords

JEL

Search

Navigation