IDEAS home Printed from https://ideas.repec.org/a/kap/iecepo/v10y2013i2p277-296.html
   My bibliography  Save this article

Central bank communication and correlation between financial markets: Canada and the United States

Author

Listed:
  • Melanie-Kristin Beck
  • Bernd Hayo
  • Matthias Neuenkirch

Abstract

We study the correlation between pairs of bond and stock markets in Canada and the United States between January 1998 and December 2009 in the framework of diagonal-BEKK models. Our research question is whether monetary policy actions and communications by the Bank of Canada and the Federal Reserve significantly affect the conditional co-movement of financial markets (i) within Canada and (ii) between Canada and the United States. We find that central bank communication significantly increases the correlation of financial markets within and across the two countries and is particularly important for the correlation of Canadian and US long-term interest rates. Copyright Springer-Verlag 2013

Suggested Citation

  • Melanie-Kristin Beck & Bernd Hayo & Matthias Neuenkirch, 2013. "Central bank communication and correlation between financial markets: Canada and the United States," International Economics and Economic Policy, Springer, vol. 10(2), pages 277-296, June.
    • Handle: RePEc:kap:iecepo:v:10:y:2013:i:2:p:277-296
    DOI: 10.1007/s10368-012-0211-x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10368-012-0211-x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10368-012-0211-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bernd Hayo & Matthias Neuenkirch, 2012. "Domestic Or U.S. News: What Drives Canadian Financial Markets?," Economic Inquiry, Western Economic Association International, vol. 50(3), pages 690-706, July.
    2. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    3. Hayo, Bernd & Kutan, Ali M. & Neuenkirch, Matthias, 2010. "The impact of U.S. central bank communication on European and pacific equity markets," Economics Letters, Elsevier, vol. 108(2), pages 172-174, August.
    4. Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
    5. Suk-Joong Kim & Fari Moshirian & Eliza Wu, 2018. "Dynamic Stock Market Integration Driven by the European Monetary Union: An Empirical Analysis," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 10, pages 305-368, World Scientific Publishing Co. Pte. Ltd..
    6. Roy van der Weide, 2002. "GO-GARCH: a multivariate generalized orthogonal GARCH model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 549-564.
    7. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    8. Weide, R. van der, 2002. "Generalized Orthogonal GARCH. A Multivariate GARCH model," CeNDEF Working Papers 02-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    9. Dominique Guegan & Florian Ielpo, 2009. "Further evidence on the impact of economic news on interest rates," Post-Print halshs-00439820, HAL.
    10. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    11. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Staff Working Papers 01-5, Bank of Canada.
    12. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 509-541, March.
    13. Luc Bauwens & Sébastien Laurent & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109, January.
    14. Dominique Guégan,Florian Ielpo, 2009. "Further Evidence on the Impact of Economic News on Interest Rates," Frontiers in Finance and Economics, SKEMA Business School, vol. 6(2), pages 1-45, October.
    15. repec:pri:cepsud:161blinder is not listed on IDEAS
    16. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    17. Chen, Gong-meng & Firth, Michael & Meng Rui, Oliver, 2002. "Stock market linkages: Evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1113-1141, June.
    18. Bessler, David A. & Yang, Jian, 2003. "The structure of interdependence in international stock markets," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 261-287, April.
    19. Dominique Guégan & Florian Ielpo, 2007. "Further evidence on the impact of economic news on interest," Documents de travail du Centre d'Economie de la Sorbonne b07062, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    20. Tse, Y K & Tsui, Albert K C, 2002. "A Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model with Time-Varying Correlations," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 351-362, July.
    21. Bernd Hayo & Ali M. Kutan & Matthias Neuenkirch, 2008. "Financial Market Reaction to Federal Reserve Communications: Does the Crisis Make a Difference?," MAGKS Papers on Economics 200808, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy, Twitter and financial markets: evidence from social media traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy and financial markets: evidence from Twitter traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Pavel Gertler & Roman Horváth & Júlia Jonášová, 2020. "Central Bank Communication and Financial Market Comovements in the Euro Area," Open Economies Review, Springer, vol. 31(2), pages 257-272, April.
    4. Donato Masciandaro & Davide Romelli, 2016. "From Silence to Voice: Monetary Policy, Central Bank Governance and Communication," BAFFI CAREFIN Working Papers 1627, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2020. "Tweeting on Monetary Policy and Market Sentiments: The Central Bank Surprise Index," BAFFI CAREFIN Working Papers 20134, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jarjour, Riad & Chan, Kung-Sik, 2020. "Dynamic conditional angular correlation," Journal of Econometrics, Elsevier, vol. 216(1), pages 137-150.
    2. Caporin, Massimiliano & McAleer, Michael, 2014. "Robust ranking of multivariate GARCH models by problem dimension," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 172-185.
    3. Paolella, Marc S. & Polak, Paweł & Walker, Patrick S., 2021. "A non-elliptical orthogonal GARCH model for portfolio selection under transaction costs," Journal of Banking & Finance, Elsevier, vol. 125(C).
    4. Andrea Silvestrini & David Veredas, 2008. "Temporal Aggregation Of Univariate And Multivariate Time Series Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 458-497, July.
    5. Xiaoning Kang & Xinwei Deng & Kam‐Wah Tsui & Mohsen Pourahmadi, 2020. "On variable ordination of modified Cholesky decomposition for estimating time‐varying covariance matrices," International Statistical Review, International Statistical Institute, vol. 88(3), pages 616-641, December.
    6. Silvennoinen, Annastiina & Teräsvirta, Timo, 2007. "Multivariate GARCH models," SSE/EFI Working Paper Series in Economics and Finance 669, Stockholm School of Economics, revised 18 Jan 2008.
    7. Audrone Virbickaite & M. Concepción Ausín & Pedro Galeano, 2015. "Bayesian Inference Methods For Univariate And Multivariate Garch Models: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 76-96, February.
    8. Morana, Claudio, 2019. "Regularized semiparametric estimation of high dimensional dynamic conditional covariance matrices," Econometrics and Statistics, Elsevier, vol. 12(C), pages 42-65.
    9. Bodnar, Olha & Bodnar, Taras & Gupta, Arjun K., 2010. "Estimation and inference for dependence in multivariate data," Journal of Multivariate Analysis, Elsevier, vol. 101(4), pages 869-881, April.
    10. Jianqing Fan & Mingjin Wang & Qiwei Yao, 2008. "Modelling multivariate volatilities via conditionally uncorrelated components," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 70(4), pages 679-702, September.
    11. Noureldin, Diaa & Shephard, Neil & Sheppard, Kevin, 2014. "Multivariate rotated ARCH models," Journal of Econometrics, Elsevier, vol. 179(1), pages 16-30.
    12. Zolotko, Mikhail & Okhrin, Ostap, 2014. "Modelling the general dependence between commodity forward curves," Energy Economics, Elsevier, vol. 43(C), pages 284-296.
    13. Massimiliano Caporin & Michael McAleer, 2011. "Ranking Multivariate GARCH Models by Problem Dimension: An Empirical Evaluation," Working Papers in Economics 11/23, University of Canterbury, Department of Economics and Finance.
    14. Takashi Isogai, 2015. "An Empirical Study of the Dynamic Correlation of Japanese Stock Returns," Bank of Japan Working Paper Series 15-E-7, Bank of Japan.
    15. Chrétien, Stéphane & Ortega, Juan-Pablo, 2014. "Multivariate GARCH estimation via a Bregman-proximal trust-region method," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 210-236.
    16. García de la Fuente, Cristina & Galeano San Miguel, Pedro & Wiper, Michael Peter, 2014. "Bayesian estimation of a dynamic conditional correlation model with multivariate Skew-Slash innovations," DES - Working Papers. Statistics and Econometrics. WS ws141711, Universidad Carlos III de Madrid. Departamento de Estadística.
    17. Yip, Iris W.H. & So, Mike K.P., 2009. "Simplified specifications of a multivariate generalized autoregressive conditional heteroscedasticity model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 80(2), pages 327-340.
    18. Manabu Asai & Michael McAleer, 2009. "Dynamic Conditional Correlations for Asymmetric Processes," CARF F-Series CARF-F-168, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    19. repec:bgu:wpaper:0608 is not listed on IDEAS
    20. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
    21. Laurent, Sébastien & Rombouts, Jeroen V.K. & Violante, Francesco, 2013. "On loss functions and ranking forecasting performances of multivariate volatility models," Journal of Econometrics, Elsevier, vol. 173(1), pages 1-10.

    More about this item

    Keywords

    Bank of Canada; Central bank communication; Diagonal-BEKK models; Dynamic correlations; Federal Reserve; Financial markets; E52; F30; G12; G15;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:iecepo:v:10:y:2013:i:2:p:277-296. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.