The decomposition of US and Euro area stock and bond returns and their sensitivity to economic state variables

This paper decomposes US and Euro area excess stock and bond return innovations into news factors using the Campbell–Schiller methodology. The results indicate that stock return volatility is mostly due to volatility of future excess return news. Inflation news plays a minor role although it is significantly correlated with excess return innovations. For the bond market too, it is future return news—not inflation news—that moves bond returns most. For finite investment horizons, however, asset market movements give a differential importance to the various news components. Results are comparable for the US and the Euro area, but differ in terms of magnitudes. In addition, sensitivities (‘betas’) to a set of state variables are estimated, yielding high interest rate betas and low money growth betas. Generally, inflation, unemployment and leading indicator betas are significant. Asset market exposures to oil and exchange rate changes are more significant for the Euro area than in the US.     

The high-frequency response of exchange rates to monetary policy actions and statements

This paper investigates the impact of US monetary policy on the level and volatility of exchange rates using an event study with intraday data for five currencies (the US dollar exchange rate versus the euro, the Canadian dollar, the British pound, the Swiss franc, and the Japanese yen). I construct two indicators of news about monetary policy stemming separately from policy decisions and from balance of risk statements. Estimation results show that both policy decisions and communication have economically large and highly significant effects on the exchange rates, with the surprise component of statements accounting for most of the explainable variation in exchange rate returns in response to monetary policy. This paper also shows that exchange rates tend to absorb FOMC monetary surprises within 30-40 min from the announcement release.     

Dynamic news effects in high frequency Euro exchange rates

This paper investigates the dynamic, short-run response of Euro exchange rate returns to the information surprise of global macroeconomic announcements. In addition, it advocates a new approach to modelling intraday exchange rate volatility to allow accurate characterisation of reactions. US macroeconomic news generates far more dramatic responses in EUR–USD returns and returns volatility than news on the macroeconomic performance of other countries. However, some Eurozone and German indicators are also important and UK announcements are important for the EUR–GBP rate. The reaction of exchange rate returns to news is very quick and occurs within the first 5 min of the release with very little reaction in the 15 min before and after. These findings show that exchange rates are strongly linked to fundamentals in the 5-min intervals immediately following the data release. Reactions to news are found to vary in magnitude over the sample, with the largest responses to news occurring in response to turning points in the cumulative flow of news.     

Central bank communication and exchange rate volatility: a GARCH analysis

We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it.     

Volatility spillovers and the effect of news announcements

We examine the effect of US and European news announcements on the spillover of volatility across US and European stock markets. Using synchronously observed international implied volatility indices at a daily frequency, we find significant spillovers of implied volatility between US and European markets as well as within European markets. We observe a stark contrast in the effect of scheduled versus unscheduled news releases. Scheduled (unscheduled) news releases resolve (create) information uncertainty, leading to a decrease (increase) in implied volatility. Nevertheless, news announcements do not fully explain the volatility spillovers, although they do affect the magnitude of volatility spillovers. Our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets.     

Oral intervention in China: Efficacy of Chinese exchange rate communications

This paper analyses China's oral intervention and the efficacy of exchange rate communications by the Chinese monetary authorities. Applying the event study approach, we find that exchange rate communication could help the authorities to impact the Chinese exchange rate level moving in the desired direction. Also, China is responsive to international calls, particularly those from the US calling for the appreciation of the RMB exchange rate. But the response is moderately reluctant as the appreciation would occur after a delay of around two weeks. Finally, using the range-based variance model, confirmative evidence is found that successive, rather than solo, exchange rate communications can calm the exchange rate movement in terms of excess volatility.     

Scheduled macro-news effects on a Euro/US dollar limit order book around the 2008 financial crisis

Characteristics of a complete limit order book (LOB) for Euro/US dollar in 2006-09, are asymmetrically affected by scheduled macro news announcements during the financial crisis. Depth is the most responsive characteristic followed by spread, volatility and slope. Depth and volatility respond more to expansion surprises, while spread and slope are more sensitive to recession. The effect of the announcement’s occurrence without surprise is overwhelmingly positive (negative) for depth and volatility (spread) in both regimes. This effect is mitigated by the surprise. More than half of US scheduled news surprises have state dependent depth coefficients, most with opposing signs between recession and expansion. Using all quote levels generates stronger characteristic response, indicating the existence of information outside of the best quotes.     

Realized volatility spillovers between US spot and futures during ECB news: Evidence from the European sovereign debt crisis

We study the simultaneity impact of the European Central Bank news on the daily realized volatility transmission mechanism (spillovers) among various US spot and futures markets. To this end, we apply a bias-corrected vector autoregressive model via Wild bootstrap simulation. We use minute-by-minute intraday data to construct daily realized volatility. We consider 429 news form the ECB as important events employing two major classifications, namely, a country classification with the highest total number of days related ECB news and a type of ECB news classification. We find that investors in futures markets react more vigorously and mainly for the ECB news that is associated with the group of EMU member states applied structural reforms. Yet, more importantly, we show that the US stock markets response heterogeneously to the ECB news, as we find key disagreements in the reactions both across the US markets and the types of ECB news studied. Such evidence is consistent with the explanation of the differential interpretation of information among market participants. From a practical point of view, we suggest that investors in the US spot market can effectively use two or more futures contracts to minimize their exposure to volatility risk associated with that news.     

Emerging market exchange rates during quantitative tapering: The effect of US and domestic news

We analyze the impact of domestic and US-based news announcements of a large set of economic and policy-related fundamentals on the US dollar versus the Turkish lira exchange rate from 2013 to 2016. Since exchange rate behavior is closely related to political trust, we also incorporate the effect of domestic and global political uncertainty, using country indices based on Google search results. Contrary to previous findings, our results reveal that surprises related to the domestic economy have a greater effect on the exchange rate compared to surprises related to the US economy. Most important are the surprises related to domestic inflation and monetary policy, as well as foreign employment, while political uncertainty plays a minor role. There is also an asymmetry in the market response. Bad news about the US economy has more impact than good news, and good news about the domestic economy has more impact than bad news.     

Public information releases, private information arrival and volatility in the foreign exchange market

This paper estimates the impact of market activity and news on the volatility of returns in the exchange market for Japanese Yen and US dollars. We examine the effects of news on volatility before, during and after news arrival, using three categories of news. Market activity is proxied by quote arrival, separated into a predictable seasonal component and an unexpected component. Results indicate that both components of market activity, as well as news releases, affect volatility levels. We conclude that both private information and news effects are important determinants of exchange rate volatility. Our finding that unexpected quote arrival positively impacts foreign exchange rate volatility is consistent with the interpretation that unexpected quote arrival serves as a measure of informed trading. Corroborating this interpretation is regression analysis, which indicates that spreads increase in the surprise component of the quote arrival rate, but not in the expected component. The estimated impact of a unit increase in unexpected quote arrival and the range of values observed for this variable imply an important volatility conditioning role for informed trading.     

Earnings guidance and market uncertainty

We study the effect of disclosure on uncertainty by examining how management earnings forecasts affect stock market volatility. Using implied volatilities from exchange-traded options prices, we find that management earnings forecasts increase short-term volatility. This effect is attributable to forecasts that convey bad news, especially when firms release forecasts sporadically rather than on a routine basis. In the longer run, market uncertainty declines after earnings are announced, regardless of whether there is a preceding earnings forecast. This decline is mitigated when the firm issues a forecast that conveys negative news, implying that these forecasts are associated with increased uncertainty.     

The euro exchange rate during the European sovereign debt crisis – Dancing to its own tune?

This paper studies the determinants of the euro exchange rate volatility during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility increased in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions.     

Volatility spillovers and dynamic correlation in European bond markets

This paper examines the dynamic linkages among the European bond markets. We model the price and volatility spillovers from the US bond market and the aggregate Euro area bond market to twelve individual European bond markets using an EGARCH model that allows for a dynamic correlation structure. Our results suggest that significant volatility spillovers exist from both the aggregate Euro area bond market and the US bond market to the individual European markets. Moreover, the introduction of the Euro has strengthened the volatility spillover effects and the cross-correlations for most European bond markets.     

Exchange rate volatility and the time-varying effects of aggregate shocks

This paper investigates the dynamics of the real exchange rate and relative output among the US and five of its top six trading partners since the collapse of Bretton Woods. It employs long-run restrictions to identify the usual suspect macroeconomic shocks and their relative importance for exchange rate fluctuations. An improvement of the econometric application is that it allows for the contribution of each shock to the real exchange rate and relative output to vary over time. While the volatility of US output – both total and relative to that of the UK or Canada – is estimated to have substantially reduced since the mid-1980s, consistent with the Great Moderation findings of many others, the volatility of real exchange rates has experienced a gradual and continuous increase over the same period. Monetary shocks account for only a small fraction of these dynamics, although they do track well the increase in volatility of US output during the Great Inflation period. It is supply-type shocks that seem to be more important for the relative output volatility reductions of the mid-1980s. Conversely, demand shocks seem to account for the largest portion of the volatility increases in the real exchange rate. Perhaps unsurprisingly, both volatilities increase during the 2007 financial crisis and the ensuing 2008–2009 Great Recession – periods associated with higher economic uncertainty.     

Do external political pressures affect the Renminbi exchange rate?

This paper investigates whether external political pressure for faster Renminbi appreciation affects both the daily returns and the conditional volatility of the Renminbi central parity rate. We construct several political pressure indicators pertaining to the Renminbi exchange rate, with a special emphasis on the US pressure, to test the hypothesis. After controlling for Chinese macroeconomic surprise news, we find that US and non-US political pressure does not have a significant influence on Renminbi's daily returns. However, evidence suggests that political pressures, and especially those from the US, have statistically significant impacts on the conditional volatility of the Renminbi. Furthermore, we conduct the same exercise on the 12-month Renminbi non-deliverable forward rate. We find that the non-deliverable forward market is highly responsive to macroeconomic surprise news and there is some evidence that Sino-US bilateral meetings affect the conditional volatility of the Renminbi non-deliverable forward rate.     

Overreaction and underreaction in the foreign exchange market

Research has documented overreaction and underreaction for stocks and stock market indices, but it has not yet analyzed these phenomena with regard to currency exchange rates. This paper examines exchange rate changes following extreme 1-day fluctuations for currencies in industrialized and emerging markets. In this study, the exchange rate is defined as the number of foreign currency units per US dollar. An overreaction phenomenon for currencies in emerging markets and an underreaction phenomenon for currencies in industrial markets are found. Each extreme 1-day currency fluctuation event is classified according to the type of underlying reason as described in the Wall Street Journal. Events for which no announcements (undefined events) were found are associated with a stronger tendency toward overreaction than those events for which an explanation was given (defined events). This suggests that investors overreact more when the source of the extreme fluctuation is largely unknown. The defined events are classified into two groups: economic events and political events. There is some evidence that political events are associated with a stronger tendency toward overreaction than economic events. These findings can be attributed to uncertainty. Political events (e.g., civil uprising) should be more difficult to assess than economic events (e.g., the release of an inflation report), and undefined events should be associated with the largest degree of uncertainty. Cross-sectional analysis is used to relate post-event exchange rate changes to the magnitude of the initial exchange rate change, leakage, day of the week effects, type of currency (from emerging or industrial market), and the type of announcement (economic, political, or undefined) that appeared in the Wall Street Journal. The cross-sectional analysis confirms that currencies in emerging markets experience stronger degrees of overreaction than those of industrial markets, even after controlling for potentially confounding factors. Moreover, it confirms that undefined events experience stronger degrees of overreaction than defined events, even when controlling for other factors.     

Exchange rate dynamics under state-contingent stochastic process switching

This paper offers a closed-form solution of a process switching problem, i.e., switching the exchange rate regime from free-floating to a completely fixed one. An example of such regime change is the adoption of the Euro. In contrast to previous studies on the subject, this paper analyzes a specific case when foreign exchange market participants consider both the Euro locking rate and locking date as uncertain. Preceding the locking, the exchange rate is determined by three factors: fundamental, market expectations for the Euro locking rate, and date. The model is used to examine the conditions under which the exchange rate volatility is mitigated by the prospect of locking.     

US macroeconomic news effects around the US and European financial crises: Evidence from Brazilian and Mexican equity indices

We examine the intraday index return and volatility responses of two Latin American equity markets to US macroeconomic news releases around the periods of the US and European financial crises. We find that while index return is more sensitive than volatility to macroeconomic news in general, the five-minute Brazilian and Mexican index volatilities respond especially strongly to US news surprises, with the Brazilian response being more pronounced, especially during the expansion period. Among the macroeconomic indicators tested, FOMC rate decisions exhibit the highest impact on volatility, and there is evidence of asymmetric response to positive versus negative news.     

Information arrivals and intraday exchange rate volatility

This paper investigates the link between information arrivals and intraday DEM/$ volatility. Information arrivals are measured by the numbers of news items that appeared in the Reuters News Service. We separate news stories into different categories and find that total headline news counts, US and German macroeconomic news and German Bundesbank monetary policy news all have a significant impact on intraday DEM/$ volatility. The larger quantitative effects of the German Bundesbank monetary policy news and US macroeconomic news at 15-min intervals are consistent with the findings of a two-stage adjustment process of public information arrivals [Fleming and Remolona, J. Finance (1999) 1901]. Our results suggest that the persistent of intraday exchange rate volatility set off by public information is extended by traders’ private information about 15 min later. The conclusions are obtained from ARCH models that incorporate intraday seasonal volatility terms.     

VOLATILITY SPILLOVERS BETWEEN THE BLACK MARKET AND OFFICIAL MARKET FOR FOREIGN CURRENCY IN GREECE

The issue of volatility spillovers between the black and official exchange markets for U.S. dollars in Greece for 1975–89 is examined. A vector error correction‐bivariate EGARCH model is developed and estimated to capture potential asymmetric effects of innovations and volatility. During the period under investigation, reciprocal spillovers are found between the black and official exchange markets for dollars. Furthermore, spillovers are asymmetric in that bad news in one market has a greater effect on the volatility of the other market than good news. Additionally, the size of spillover effects is greater from the official market to the black market. Finally, the removal of the foreign exchange controls in January 1986 made the volatility of the official exchange rate higher and changed the nature of volatility spillovers between the two markets. JEL Classification: F31, F32