Domestic or U.S. News: What Drives Canadian Financial Markets?
29 Pages Posted: 22 Feb 2009 Last revised: 22 Feb 2010
Date Written: February 19, 2010
Using a GARCH model, we study the effects of Canadian and U.S. central bank communication and macroeconomic news on Canadian bond, stock, and foreign exchange market returns and volatility. First, central bank communication and macro news from both countries have an impact on Canadian financial markets. Second, Canadian central bank communication is more relevant than its U.S. counterpart, whereas in the case of macro news, that originating from the United States dominates. Third, we find evidence that the impact of Canadian news reaches its maximum when the Canadian target rate departs from the Federal Funds target rate (2002–2004) and thereafter. The introduction of fixed announcement dates (FAD) initially does not cause a noticeable break in the data. Finally, Canadian and U.S. target rate changes lead to higher price volatility, and so does other U.S. news. Other Canadian news, however, lowers price volatility.
Keywords: Bank of Canada, Central Bank Communication, Federal Reserve Bank, Financial Markets, Macroeconomic News, Monetary Policy
JEL Classification: E52, G14, G15
Suggested Citation: Suggested Citation