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


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.


Foreign exchange markets Volatility spillover News surprises Impulse response analysis 

JEL Classification

F31 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.


  1. Admati AR, Pfleiderer P (1988) A theory of intraday patterns: volume and price variability. Rev Financial Stud 1:3–40CrossRefGoogle Scholar
  2. Andersen TG, Bollerslev T (1998) Deutsche mark-dollar volatility: intraday volatility patterns, macroeconomic announcements and longer run dependencies. J Finance 1:219–265CrossRefGoogle Scholar
  3. Andersen TG, Bollerslev T, Diebold F, Vega C (2003) Micro effects of macro announcements: real-time price discovery in foreign exchange. Am Econ Rev 93:38–60CrossRefGoogle Scholar
  4. Andersen TG, Bollerslev T, Diebold F, Vega C (2007) Real-time price discovery in global stock, bond and foreign exchange markets. J Int Econ 73:251–277CrossRefGoogle Scholar
  5. Balduzzi P, Elton EJ, Green T (2001) Economic news and bond prices: evidence from the us treasury market. J Financial Quant Anal 36:523–543CrossRefGoogle Scholar
  6. Bauwens L, Ben Omrane W, Giot P (2005) News announcements, market activity and volatility in the euro/dollar foreign exchange market. J Int Money Finance 24:1108–1125CrossRefGoogle Scholar
  7. Ben Omrane W, Heinen A (2010) Public news announcements and quoting activity in teh euro/dollar foreign exchange market. Comput Stat Data Anal 54:2419–2431CrossRefGoogle Scholar
  8. Bollerslev T (1990) Modeling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH model. Rev Econ Stat 72:498–505CrossRefGoogle Scholar
  9. Bollerslev T, Domowitz I (1993) Trading patterns and prices in the inter-bank foreign exchange market. J Finance 4:1421–1443CrossRefGoogle Scholar
  10. Cai J, Cheung YL, Lee RSK, Melvin M (2001) Once in a generation yen volatility in 1998: fundamentals, intervention and order flow. J Int Money Finance 20:327–347CrossRefGoogle Scholar
  11. Cheung YW, Chinn MD (2001) Currency traders and exchange rate dynamics: a survey of the us market. J Int Money Finance 20:439–471CrossRefGoogle Scholar
  12. Degennaro RP, Shrieves R (1997) Public information releases, private information arrival and volatility in the foreign exchange market. J Empir Finance 4:295–315CrossRefGoogle Scholar
  13. Ederington LH, Lee JH (1996) The creation and resolution of market uncertainty: the impact of information releases on implied volatility. J Financial Quant Anal 31:513–539CrossRefGoogle Scholar
  14. Engle RF (2002) Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models. J Bus Econ Stat 20:339–350CrossRefGoogle Scholar
  15. Evans MD, Lyons RK (2005) Do currency markets absorb news quickly? J Int Money Finance 24:197–217CrossRefGoogle Scholar
  16. Evans MD, Lyons RK (2008) How is macro news transmitted to exchange rates? J Financial Econ 88:26–50CrossRefGoogle Scholar
  17. Gallant AR, Rossi PE, Tauchen G (1993) Nonlinear dynamic structures. Econometrica 61:871–907CrossRefGoogle Scholar
  18. Hafner C, Herwartz H (2006) Volatility impulse response functions for multivariate garch models: an exchange rate illustration. J Int Money Finance 25:719–740CrossRefGoogle Scholar
  19. Hong Y (2001) A test for volatility spillover with application to exchange rates. J Econom 103:183–224CrossRefGoogle Scholar
  20. Jeantheau T (1998) Strong consistency of estimators for multivariate ARCH models. Econom Theory 14:70–86CrossRefGoogle Scholar
  21. Koop G, Pesaran MH, Potter SM (1996) Impulse response analysis in nonlinear multivariate models. J Econom 74:119–147CrossRefGoogle Scholar
  22. Lin W-L (1997) Impulse response function for conditional volatility in garch models. J Bus Econ Stat 15:15–25Google Scholar
  23. Ling S, McAleer M (2003) Asymptotic theory for a vector ARMA-GARCH model. Econom Theory 19:280–310Google Scholar
  24. Lo AW, MacKinlay AC (1990) An econometric analysis of nonsynchronous trading. J Econom 45:181–211CrossRefGoogle Scholar
  25. Lütkepohl H (1993) Introduction to multiple time series analysis. Springer, BerlinCrossRefGoogle Scholar
  26. Lyons RK (1997) A simultaneous trade model of the foreign exchange hot potato. J Int Econ 45:181–211Google Scholar
  27. Norris JR (1997) Markov Chains. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  28. Sims C (1980) Macroeconomics and reality. Econometrica 48:1–48CrossRefGoogle Scholar

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

Personalised recommendations