Exchange rate volatility response to macroeconomic news during the global financial crisis |
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| Affiliation: | 1. Goodman School of Business, Brock University, Canada;2. Faculty of Business Administration, Bilkent University, Turkey;1. IMF Research Department International Monetary Fund, 700 19th St NW, Washington, DC 20431, USA;2. EconomiX, Université Paris Ouest-Nanterre, France;3. University of Jena, Germany;4. IMF Institute for Capacity Development, USA;5. University of Stellenbosch, South Africa;1. Asia and Pacific Department, International Monetary Fund, 700 19th Street, N.W., Washington, DC, USA;2. International Department, Bank of Korea, 39 Namdaemun-Ro, Jung-Gu, Seoul, Republic of Korea;3. Department of International Business & Trade, Kyung Hee University, 26 Kyungheedae-ro, Dongdaemun-gu, Seoul 02447, Republic of Korea |
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| Abstract: | We investigate the volatility reaction to macroeconomic news in major currency markets during the recent global financial crisis. We first present an alternative method for determining the changes in economic states by endogenously estimating crisis thresholds. Second, we assess which macroeconomic indicator gave the earliest warning signal for the upcoming contraction. Third, we investigate whether there is a systematic change in the volatility reaction of exchange rates to news during the crisis period. We find that the estimated logistic transition function based on the housing starts data exhibits the earliest warning signal compared to other indicators. Our results suggest that although volatility response to most news indicators is larger in expansion, currency market reaction to new home sales and Fed funds rate news is larger in the crisis period. We attribute this finding to the context-specific relevance of the housing and credit sectors in the evolution of the global financial crisis. |
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