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JEL classification: F31 F4 G1We investigate the volatility reaction to macroeconomic news in major currency markets during the recent global financial crisis. We first present an alternative method for determining the changes in economic states by endogenously estimating crisis thresholds. Second, we assess which macroeconomic indicator gave the earliest warning signal for the upcoming contraction. Third, we investigate whether there is a systematic change in the volatility reaction of exchange rates to news during the crisis period. We find that the estimated logistic transition function based on the housing starts data exhibits the earliest warning signal compared to other indicators. Our results suggest that although volatility response to most news indicators is larger in expansion, currency market reaction to new home sales and Fed funds rate news is larger in the crisis period. We attribute this finding to the context-specific relevance of the housing and credit sectors in the evolution of the global financial crisis.

This paper examines the link between exchange rate volatility and economic fundamentals. In the framework of a multivariate volatility model that allows for volatility spillover, we develop a new impulse response analysis to estimate and decompose the simultaneous effect of macroeconomic news surprises on the foreign exchange volatility. We show that news announcement effects include two components; a direct and an indirect effect induced by volatility spillover. We show that more than 50% of the total accumulated news effect on the Pound and the Yen are due to volatility transmission from the two major currencies and mainly from the Euro. I N S T I T U T D E S T A T I S T I Q U E B I O S T A T I S T I Q U E E T S C I E N C E S A C T U A R I E L L E S ( I S B A )UNIVERSITÉ CATHOLIQUE DE LOUVAIN BEN OMRANE, W. and C. HAFNER D I S C U S S I O N P A P E R 2013/59Macroeconomic news surprises and volatility spillover in foreign exchange markets AbstractThis paper examines the link between exchange rate volatility and economic fundamentals. In the framework of a multivariate volatility model that allows for volatility spillover, we develop a new impulse response analysis to estimate and decompose the simultaneous effect of macroeconomic news surprises on the foreign exchange volatility. We show that news announcement effects include two components; a direct and an indirect effect induced by volatility spillover. We show that more than 50% of the total accumulated news effect on the Pound and the Yen are due to volatility transmission from the two major currencies and mainly from the Euro.JEL: F31, F4, C32, C5

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This study investigates the impact of 70 US and EU macroeconomic news announcements on euro/dollar returns and volatility from November 2004 to April 2014. We use regime smooth transition regression to endogenously define recession and expansion. Our sample period includes the US mortgage crisis and EU sovereign debt crisis. Most news is unstable as its effect varies between these economic states. There are asymmetrical effects between recession and expansion states for both US and EU news, with most US news having a larger impact and nearly double the number of significant EU announcements. Volatility increases for over 85% of news coefficients, with more than half still being significantly different between states.