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The impact of news on the exchange rate of the lira and long-term interest rates

  • Fornari, Fabio
  • Monticelli, Carlo
  • Pericoli, Marcello
  • Tivegna, Massimo

This paper analyzes the impact of news on several Italian financial variables, paying particular attention to the effect on the conditional volatility of these variables. The analysis spans a period of great financial and political turbulence in Italy, including the rapid succession of three governments. News releases (articles on political and economic events collected daily from both the Italian and international economic press) are classified as unscheduled (mostly political) and scheduled (i.e. economic and monetary statistics whose announcement is expected by market participants). The analysis is divided into two phases: first, we estimate the impact of each single political and economic news item on asset price changes and their conditional variance; second, those items that are identified as significant in the first stage are then aggregated into six dummies according to their nature and origin and employed as exogenous variables in a trivariate Garch scheme. Results show that i) news affects both the first and the second moment of the daily changes in the analyzed variables; ii) there is a significant regime shift of the unconditional variance of the analyzed variables across the three different governments; iii) the conditional variances display a significant � albeit rather small � seasonal dayweek pattern; iv) contrary to the conventional view, the impact of news on the conditional variance is more pronounced for exchange rates than for Italian long-term interest rates.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 19 (2002)
Issue (Month): 4 (August)
Pages: 611-639

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Handle: RePEc:eee:ecmode:v:19:y:2002:i:4:p:611-639
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
  2. Takatoshi Ito & V. Vance Roley, 1986. "News from the U.S. and Japan: which moves the yen/dollar exchange rate?," Research Working Paper 86-02, Federal Reserve Bank of Kansas City.
  3. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-23, July.
  4. Mitchell, Mark L & Mulherin, J Harold, 1994. " The Impact of Public Information on the Stock Market," Journal of Finance, American Finance Association, vol. 49(3), pages 923-50, July.
  5. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
  6. Ederington, Louis H. & Lee, Jae Ha, 1996. "The Creation and Resolution of Market Uncertainty: The Impact of Information Releases on Implied Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(04), pages 513-539, December.
  7. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  8. Hardouvelis, Gikas A., 1988. "Economic news, exchange rates and interest rates," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 23-35, March.
  9. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  10. Hogan, Ked & Melvin, Michael & Roberts, Dan J., 1991. "Trade balance news and exchange rates: Is there a policy signal?," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages S90-S99, March.
  11. Fabio Fornari & Antonio Mele, 2001. "Volatility smiles and the information content of news," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 179-186.
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