Macroeconomic news surprises and volatility spillover in foreign exchange markets
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This paper examines the link between exchange rate volatility and economic fundamentals. In the framework of a multivariate volatility model that allows volatility spillover, we develop a new impulse response analysis to estimate and decompose the simultaneous effect of macroeconomic news surprises on the foreign exchange volatility. We show that news announcement effects include two components: a direct and an indirect effect induced by volatility spillover. We show that more than 50 % of the total accumulated news effect on the Pound and the Yen is due to volatility transmission from the two major currencies and mainly from the Euro.
KeywordsForeign exchange markets Volatility spillover News surprises Impulse response analysis
JEL ClassificationF31 F4 C32 C5
The authors would like to thank Murray William and Peter Neczesny, all participants at the interdisciplinary workshop on multivariate time series held at the Catholic University of Louvain, especially Robert Engle and Luc Bauwens, as well as all session participants at the Eastern Finance Association (EFA), Financial Management Association (FMA) and the European Financial Management Association (EFMA) 2012 annual meetings, for helpful comments and discussions. Ben Omrane acknowledges the financial support by the Social Sciences and Humanities Research Council of Canada (SSHRC). Hafner acknowledges the financial support from the contract Projet d’Actions de Recherche Concertées nr. 07/12/002 of the Communauté francaise de Belgique, granted by the Académie universitaire Louvain.
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