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News implied volatility and long-term foreign exchange market volatility

Yang Liu, Liyan Han and Libo Yin

International Review of Financial Analysis, 2019, vol. 61, issue C, 126-142

Abstract: We apply the GARCH-MIDAS-X component framework to investigate the effect of news uncertainty on long-term exchange rate volatility. Strong empirical results reveal that market-wide information, news implied volatility (NVIX), plays an incremental role in explaining the secular volatility of FX markets relative to specific news announcements. In addition, our analysis distinguishes five sources of NVIX: Financial Intermediation, Stock Markets, Government, Natural Disasters and War. The evidence related to the five sub-indexes suggests that news regarding Financial Intermediation, Stock Markets and Government have a more significantly positive, long-run spillover impact on the volatilities of currencies. Moreover, although natural disasters and wars are rare, the news regarding them produces highly destructive impacts on society and exerts an influence on relevant currencies.

Keywords: News implied volatility; Foreign exchange market; Long-term volatility; Incremental effect; GARCH-MIDAS-X model (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:finana:v:61:y:2019:i:c:p:126-142