The High‐Frequency Responses of Australian Financial Futures to Unexpected Cash Rate Announcements*

This study examines the high‐frequency responses of Australian financial futures to monetary surprises using intra‐day futures data. Using the event window method with tick data to control for the endogeneity between market interest rates and the cash rate, our empirical findings support the following. First, monetary policy announcements significantly impact not only short‐term interest rate futures but also longer‐term treasury security future markets. Second, the most significant responses of these markets occur in the event window that contains the policy announcement. Third, we also find that the monetary policy is not well anticipated by market participants until the Reserve Bank of Australia’s policy release.     

TRADER TYPE EFFECTS ON THE VOLATILITY‐VOLUME RELATIONSHIP EVIDENCE FROM THE KOSPI 200 INDEX FUTURES MARKET

We investigate whether the trading activity generated by investors with different access to information and trading motives has positive or negative impact on index futures volatility. Surprises in non‐member institutional, individual and foreign investors' trading volume are positively associated with volatility in most of the cases. For member institutional investors, unexpected trading volume is positively related to volatility. Long‐run changes in the trading activity also affect volatility differently across trader types. Finally, allowing for time‐to‐maturity effects, surprises in open interest are associated with more volatility towards contract expiration, contrary to the negative effect we find during normal times.     

The impact of the ECB's conventional and unconventional monetary policies on stock markets

Using an event study method, we examine how stock markets respond to the policies of the European Central Bank during 1999–2015. We use market prices of futures (government bonds) to identify surprises in (un)conventional monetary policy. Our results suggest that especially unconventional monetary policy surprises affect the EURO STOXX 50 index. We also find evidence for the credit channel, notably for unconventional monetary policy surprises. Our results also suggest that value and past loser stocks show a larger reaction to monetary policy surprises. These results are confirmed if identification of monetary policy surprises is based on the Rigobon–Sack heteroscedasticity approach.     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Interest Parity,Monetary Policy and the Volatility of Australian Short-Term Interest Rates: 1978–1982*

The period since the introduction of the Treasury note tender in December 1979 has been characterized by increased variability of Australian short-term interest rates. Using a methodology suggested by Evans, the increase in variability of the 90-day commercial bill rate is decomposed into that attributable to domestic monetary policy, seasonal influences, covered international interest rate movements and other miscellaneous influences. The results suggest that after December 1979 Australian short-term interest rates became more sensitive to surprises in the domestic monetary base, covered Eurodollar rate surprises and seasonal influences. Increased volatility of the covered Eurodollar rate also contributed to increased variance of domestic rates.     

Financial Deregulation and the Monetary Transmission Mechanism

Major changes to the Australian financial system in the 1980s may possibly have influenced the effects of monetary policy on economic activity. Using vector autoregressive econometric techniques we find that the deregulation of the financial system has made very little difference to the reduced form relationships among interest rates, employment growth, inflation and the growth rate of real credit. We find that interest rates are an important determinant of the business cycle, with credit being much less significant. We also find that monetary policy reacts to unexpected movements in real variables but does not react to surprises in the inflation rate.     

The effect of relative monetary surprises on spot exchange rates

This paper examines the hypothetical relationship between US and Canadian monetary surprises and the behaviour of US-Canadian spot exchange rates. Past studies have found that positive US monetary surprises were correlated with an appreciating US dollar in foreign exchange markets.

In this paper, it is argued that monetary surprises in the US must be measured relative to foreign monetary innovation (rather than in the conventional absolute sense) when examining their impact on exchange markets. Rational investors consider expected returns and risk differentials in the US and local markets jointly in determining whether to be net buyers or sellers of US dollars. The monetary actions of both the Fed and the Central Bank operating in the local (foreign) economy will be considered in the foreign exchange market. Because of the close synchronization between the weekly money supply announcements in Canada and the US, it is possible to examine whether the relative or absolute US monetary surprise is more significant in the foreign exchange market. The empirical findings provide considerable support for the relative over the absolute measure of US monetary innovations. With monetary innovations measured in relative terms, the empirical results provide support for the policy reaction over the inflation expectation hypothesis.     

Exchange Rate Movements and Unemployment in the EU Accession Countries—A Panel Analysis

According to the traditional “optimum currency area” approach, not much will be lost from a very hard peg to a currency union if there has been little reason for variations in the exchange rate. This paper takes a different approach, and highlights the fact that high exchange rate volatility may as well signal high costs for labor markets. The impact of exchange rate volatility on labor markets in the CEECs is put to the test, finding that volatility vis‐à‐vis the euro significantly increases unemployment. Hence, the elimination of exchange rate volatility could be considered as a substitute for a removal of employment protection legislation. However, labor market reform could be argued to be an equally worthy strategy, backed up by central bank independence and the adoption of an anti‐inflation monetary policy rule.     

The effect of FOMC statements on asset prices

Given their increased importance during recent years, FOMC (Federal Open Market Committee) statements can have a significant impact on asset prices. To capture the effect of FOMC statements on asset prices, an indicator variable is created that takes into account the information content of policy statements. Results show that both ‘interest rate surprises’ and ‘FOMC statements’ affect the mean and the volatility of asset prices. The volatility impact is tent-shaped, jumping within the policy announcement interval and declining before and after the release. FOMC statements have a much more pronounced impact on stock returns, intermediate and long-term yields, while short-term rates are largely driven by target rate decisions. We also find that the evolution of the language of the FOMC statements does matter to market participants and, in particular, the ‘forward-looking’ language adopted in mid-2003 has reduced market volatility associated with ‘interest rate surprises’ on announcement days.     

The impact of interest rate and exchange rate volatility on banks' stock returns and volatility: Evidence from Turkey

This paper investigates the effects of interest rate and foreign exchange rate changes on Turkish banks' stock returns using the OLS and GARCH estimation models. The results suggest that interest rate and exchange rate changes have a negative and significant impact on the conditional bank stock return. Also, bank stock return sensitivities are found to be stronger for market return than interest rates and exchange rates, implying that market return plays an important role in determining the dynamics of conditional return of bank stocks. The results further indicate that interest rate and exchange rate volatility are the major determinants of the conditional bank stock return volatility.     

Volatility spillovers of unconventional monetary policy to emerging market economies

Emerging market economies (EMEs) have experienced waves of market volatility since the global financial crisis, with some commentators ascribing this at least partly related to monetary policy decisions in advanced economies. This paper examines volatility spillovers from changes in the size of the balance sheets of the Federal Reserve (FED) and European Central Bank (ECB) to EMEs from 2003 to 2018. We find that volatility spillovers to EME currency markets are greater in magnitude from the FED, while EME stock and bond markets are also vulnerable to volatility spillovers in a similar magnitude from both the ECB and the FED. We find only limited evidence of volatility transmission to the real economy of EMEs following the monetary policy actions of the FED and ECB. Finally, we show that the proportion of the volatility in EMEs that is accounted for by changes in FED and ECB balance sheets shifts over time. Our paper has important policy implications for EMEs, notably in respect of volatility transmission channels.     

金融市场条件与货币政策关系的解析——基于四元VAR-GARCH(1,1)-BEKK模型的分析

本文基于我国股票市场、债券市场、外汇市场以及货币市场的日数据,选取四变量VAR(6)-GARCH(1,1)-BEKK模型,分析了汇率改革以来股票市场、债券市场、外汇市场与货币政策的互动关系。研究显示,上述三个主要金融市场与货币市场间存在显著的一阶矩和二阶矩关联性,说明中央银行的货币政策可能关注了金融市场条件的变化。基于脉冲响应函数的分析表明,中央银行的货币政策意图能够在金融市场间较为有效传导,同时,金融市场条件的变化对货币政策传导构成一定程度的冲击。为此,中央银行需要提高对金融市场变化的关注程度,增强货币政策的透明度,并强化货币政策与汇率政策的协调搭配,以减小外部冲击对宏观经济稳定的影响。     

Realized volatility transmission: The role of jumps and leverage effects

This paper is the first to employ a multivariate extension of the LHAR–CJ model for realized volatility of Corsi and Renó (2012) considering continuous and jump volatility components and leverage effects. The model is applied to financial (S&P 500), commodity (WTI crude oil) and forex (US$/EUR) intraday futures data and allows new insights in the transmission mechanisms among these markets. Besides significant leverage effects, we find that the jump components of all considered assets do not contain incremental information for the one-step ahead realized volatility. The volatility of S&P 500 and US$/EUR exchange rate futures exhibits significant spillovers to the realized volatility of WTI. Moreover, decreasing equity prices appear to increase volatility in other markets, while strengthening of the US$ seems to calm down the crude oil market.     

ASYMMETRIC INFORMATION IMPACTS: EVIDENCE FROM THE AUSTRALIAN TREASURY-BOND FUTURES MARKET

Abstract.  The effect of information flows on the return volatility of Australian 3-year Treasury bond futures is examined using linear and non-linear GARCH models. Results show significant asymmetric information effects, where bad news has a greater impact on volatility than good news and a non-linear Threshold ARCH(1,1) in mean model provides the most accurate estimation of return volatility. Diagnostic tests confirm this finding and out of sample forecasting error statistics verify that the Threshold ARCH(1,1) in mean model yields the lowest forecasting error. The Threshold ARCH(1,1)-M model is best at capturing the asymmetric information impact on the Australian three-year T-Bond futures return volatility.     

The nonlinear effects of expected and unexpected components of monetary policy on the dynamics of REIT returns

This paper examines empirically whether the expected and unexpected components of monetary policy have nonlinear impacts on the dynamics of REIT returns. Empirical results find the nonlinear response of REIT returns to expected and unexpected components of monetary policy. The unexpected component of monetary policy plays a more prominent role in influencing REIT returns than does the expected component of monetary policy. Specifically, unexpected contractionary monetary policy has a significantly adverse impact on REIT returns, and the adverse effect in a bust market is stronger than in a boom market. In addition, the unexpected monetary policy will also affect the boom-bust dynamics of REIT returns through its effect on the time-varying transition probability matrix. The tightening of the expected and unexpected components of monetary policy will enhance the probability that the REIT market will stay in the bust regime.     

Inflation Expectations and Monetary Policy Surprises*

We estimate monetary policy surprises for European consumers over time, based on monetary policy changes that were unanticipated according to consumers’ stated beliefs. We find that such monetary policy surprises have the opposite impact on inflation expectations from the impact found when assuming that consumers are well informed. Relaxing the latter assumption by focusing on consumers’ stated beliefs, unanticipated increases in the interest rate raise inflation expectations before the 2008 financial crisis. This is consistent with imperfect information theoretical settings where interest rate hikes are interpreted as positive news about the state of the economy by consumers who know that policymakers have relatively more information.     

Asset prices and expected monetary policy: evidence from daily data

This article explores the relationships among Libor, gold prices, the exchange rate, oil prices, fed funds futures prices and stock prices at a daily frequency. This article examines whether expected monetary policy, measured by changes in the prices of fed funds futures contracts, reacts to high frequency changes in asset prices and, in turn, whether asset prices respond to changes in expected monetary policy. The article reveals that there are statistically significant relationships between expected US monetary policy and shocks to Libor and exchange rates. It also reveals that there is no evidence of a systematic relationship between stock prices and expected monetary policy changes. Splitting the data into expansionary and recessionary periods using NBER dating, we find results for the expansionary periods that are very similar to the results for the entire period. For the periods of recession, we find little evidence of significant linkages between markets.     

The impact of federal funds target changes on interest rate volatility

This paper empirically investigates the 1-day response of interest rate volatility to a federal funds target rate change over the period 1989–2003. Federal funds futures data are used to distinguish between anticipated and unanticipated changes in the funds rate target. Interest rate volatility is modeled as an EGARCH process. The volatility response to an unanticipated Fed policy action is relatively large in size and highly significant for short-term interest rates. However, interest rates at long maturities are found to be responsive to target rate changes, even if they are anticipated, when estimations take into account of structural change in association with the Fed's policy disclosure beginning in 1994, as well as asymmetrical effects between monetary easing and tightening.     

Euro‐Area Yield Curve Reaction to Monetary News

Abstract. Using intraday data, we assess the impact of monetary news on the full length of the euro‐area yield curve. We find that the publication of monetary data has a significant impact on interest rates with maturities ranging from one to ten years, with the largest effect on the one‐ to five‐year segment. These results suggest that when gauging the policy‐relevant signals, market participants look through short‐term movements of annual M3 growth and focus instead on the trend rate of monetary expansion over the medium term.     

Carry trades and US monetary policy

I document that Federal Reserve expansionary monetary policy has a positive impact on the excess returns arising from currency carry trades. I show that expansive monetary surprises are associated with an increase in future real interest differentials between high interest rate currencies and the US dollar, which leads to higher capital flows toward those currencies and an increase in their returns. Since this increase is not fully compensated by a decrease in the returns from the short position in low interest rate currencies, unexpected monetary expansions in the US result in higher carry trade returns.