Do macro-economic news announcements affect the volatility of foreign exchange rates? Some evidence from Australia

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Abstract:

This paper investigates the role of Australian macro-economic announcement news on five major Australian dollar (AUD) exchange rates. Specifically, the daily changes of the exchange rates are modelled to ascertain the existence and the nature of the news effects in the conditional mean and variance of the changes. It is found that a higher than expected current account deficit and unemployment rate announcements depreciated the AUD, and an unexpectedly higher GDP growth announcement appreciated it. Current account deficit, CPI and unemployment news announcements significantly raised the conditional volatility of the changes of the AUD on the days of their announcements, except for the BP/AUD for the CPI news, and there is some evidence of retail sales news reducing it. In general, the evidence is consistent with a view that a release of new information creates uncertainty in the markets due to a lack of consensus on the effects of the particular news announcement and the necessary course of action. In addition, the EGARCH(1,1)-in-Mean modelling of the daily changes of the exchange rates is found to be very successful in addressing the observed statistical properties of the daily changes: leptokurtosis, time-varying heteroscedasticity and asymmetric response of the conditional volatility to unexpected changes.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/000368499323030

Publication date: December 1, 1999

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