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Central bank communication and exchange rate volatility: a GARCH analysis

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  • Radovan Fiser
  • Roman Horvath

Abstract

We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Macroeconomics and Finance in Emerging Market Economies.

Volume (Year): 3 (2010)
Issue (Month): 1 ()
Pages: 25-31

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Handle: RePEc:taf:macfem:v:3:y:2010:i:1:p:25-31

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Keywords: central bank communication; exchange rate; GARCH;

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References

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  1. 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," DNB Working Papers 170, Netherlands Central Bank, Research Department.
  2. Ehrmann, Michael & Fratzscher, Marcel, 2007. "The timing of central bank communication," European Journal of Political Economy, Elsevier, vol. 23(1), pages 124-145, March.
  3. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  4. Kim, Suk-Joong & McKenzie, Michael D. & Faff, Robert W., 2004. "Macroeconomic news announcements and the role of expectations: evidence for US bond, stock and foreign exchange markets," Journal of Multinational Financial Management, Elsevier, vol. 14(3), pages 217-232, July.
  5. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
  6. Kocenda, Evzen & Valachy, Juraj, 2006. "Exchange rate volatility and regime change: A Visegrad comparison," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 727-753, December.
  7. Ales Bulir & Katerina Smídková, 2008. "Striving to Be "Clearly Open" and "Crystal Clear"," IMF Working Papers 08/84, International Monetary Fund.
  8. Evans, Martin D.D. & Lyons, Richard K., 2005. "Do currency markets absorb news quickly?," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 197-217, March.
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Citations

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Cited by:
  1. Matthias Neuenkirch, 2011. "Central Bank Transparency and Financial Market Expectations: The Case of Emerging Markets," MAGKS Papers on Economics 201136, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Égert, Balázs & Kočenda, Evžen, 2014. "The impact of macro news and central bank communication on emerging European forex markets," Economic Systems, Elsevier, vol. 38(1), pages 73-88.
  3. Xinsheng Lu & Ying Zhou & Mingting Kou, 2013. "The Impact of Monetary Policy Surprises on Australian Financial Futures Markets," Working Papers 2013-01, Auckland University of Technology, Department of Economics.
  4. Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, vol. 23(1), pages 60-72.

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