Exchange rates and macro news in emerging markets

Guglielmo Maria Caporale,Fabio Spagnolo,Nicola Spagnolo

doi:10.1016/j.ribaf.2018.06.007

Guglielmo Maria Caporale, Fabio Spagnolo + Show 1 more

Open Access

https://doi.org/10.1016/j.ribaf.2018.06.007

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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-a-vis 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; further, the recent global financial crisis appears to have had a significant impact. The conditional correlations also provide evidence of co-movement. Finally, as expected the impact of news is more muted in the case of managed currencies, significant spillovers only being found in the case of foreign news in the crisis period.

Highlights

The impact of macro news on exchange rates is a topic that has attracted considerable interest in recent years
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
Mean spillovers in most cases do not appear to have been affected by the 2008 financial crisis

Summary

Introduction

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. Whilst evidence is widely available in the case of the developed countries (see the studies surveyed by Blinder et al, 2008 and Cavusoglu, 2010), this study is a comprehensive one focusing on the CEECs. Having obtained long-run equilibrium exchange rates from a monetary model, they proceed to estimate high-frequency GARCH(1,1) models for each currency and find a significant impact of macro news, and of central bank communications, but only during the crisis period starting in 2008.

The model

Empirical Analysis

Conclusions