Macroeconomic News Surprises and Volatility Spillover in the Foreign Exchange Markets
36 Pages Posted: 29 Jan 2018
Date Written: October 3, 2011
This paper addresses the central open issue in exchange rate economics: the link between exchange rate volatility and economic fundamentals. In the framework of a multivariate volatility model that allows for 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 are 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, High frequency data
JEL Classification: F31, F4, C32, C5
Suggested Citation: Suggested Citation