Domestic or U.S. News: What Drives Canadian Financial Markets?

Bernd Hayo () and Matthias Neuenkirch ()

No 200908, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: Using a GARCH model, we study the effects of Canadian and U.S. central bank communication and macroeconomic news on Canadian bond, stock, and foreign exchange market returns and volatility. First, news in both categories and from both countries has an impact on all financial markets. Canadian and U.S. price shocks and monetary policy news are less important than shocks relating to the real economy. Second, Canadian central bank communication is more relevant than its U.S. counterpart, whereas in the case of macro news that originating from the United States dominates. Third, we find evidence that the impact of Canadian news reaches its maximum when the Canadian target rate departs from the Federal Funds target rate (2002–2004) and thereafter. The introduction of fixed announcement dates (FAD) does initially not cause a noticeable break in the data. Finally, Canadian and U.S. target rate changes lead to higher price volatility, and so does other U.S. news. Other Canadian news, however, lowers price volatility.

Keywords: Bank of Canada; Central Bank Communication; Federal Reserve Bank; Financial Markets; Macroeconomic News; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:mar:magkse:200908

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