Central Bank Communication and Correlation between Financial Markets: Canada and the United States
22 Pages Posted: 5 Jan 2012 Last revised: 9 Jul 2012
Date Written: July 9, 2012
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.
Keywords: Bank of Canada, Central Bank Communication, Diagonal-BEKK Models, Dynamic Correlations, Federal Reserve, Financial Markets
JEL Classification: E52, F30, G12, G15
Suggested Citation: Suggested Citation