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Empirical Economics

, Volume 48, Issue 2, pp 577–607 | Cite as

Macroeconomic news surprises and volatility spillover in foreign exchange markets

  • Walid Ben Omrane
  • Christian HafnerEmail author
Article

Abstract

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.

Keywords

Foreign exchange markets Volatility spillover News surprises Impulse response analysis 

JEL Classification

F31 F4 C32 C5 

Notes

Acknowledgments

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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Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  1. 1.Goodman School of BusinessBrock UniversitySt. CatharinesCanada
  2. 2.Louvain School of Statistics, Biostatistics and Actuarial SciencesCatholic University of LouvainLouvain-La-NeuveBelgium

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