Abstract
This paper uses a VAR-GARCH(1,1) model to analyse mean and volatility spillovers between macro news (in the form of newspaper headlines) and the exchange rates vis-avis both the US dollar and the euro of the currencies of a group of emerging countries including the Czech Republic, Hungary, Indonesia, Korea, Mexico, Poland, South Africa, Thailand and Turkey over the period 02/1/2003-23/9/2014. The results suggest limited dynamic linkages between the first moments compared to the second moments, causality-in-variance being found in a number of cases. The conditional correlations also provide evidence of co-movement. Finally, the recent global financial crisis appears to have had a significant impact.
Highlights
The impact of macro news on exchange rates is a topic that has attracted considerable interest in recent years
Since 2008 there has been a substantial increase in exchange rate volatility vis-a-vis the Euro and the US dollar in all countries (Figures 1 and 2), the single exception occurring in the case of the Egyptian currency vis-a-vis the US dollar
It makes several contributions to the existing literature: (i) it considers news in the form of newspaper headlines, that provide an interpretation of macro releases driving agents’ investment decisions (Birz and Lott, 2011); (ii) it adopts an econometric framework shedding light on both mean and volatility spillovers; (iii) its coverage of emerging markets is extensive; (iv) it examines the possible effects of the recent global financial crisis; (iv) it controls for domestic monetary policy and other financial shocks
Summary
The impact of macro news on exchange rates is a topic that has attracted considerable interest in recent years. Cai et al (2009) consider the effects of US and domestic news announcements on nine emerging markets (Czech Republic, Hungary, Indonesia, Korea, Mexico, Poland, South Africa, Thailand and Turkey) They follow Andersen et al (2003) and model currency returns as a function of news including lagged effects and heteroscedastic errors, where the latter are the sum of the daily volatility forecast (based on a GARCH(1,.1) specification), the absolute value of news surprises including lags, and the Fourier flexible for the calendar effect.
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