Volatility and macroeconomic news spillovers in stock and foreign exchange markets

This dissertation is comprised of three studies which investigate volatility in the stock and foreign exchange markets, both in terms of contagion (volatility spillovers) and fundamental determinants (macroeconomic news). The first study investigates the time series of volatility spillovers from 2000-2014 across 16 major stock markets from both developed and emerging economies. Using the spillover index methodology put forward by Diebold and Yilmaz (2012), we find that spillovers increased dramatically during the 2008 global financial crisis (GFC) and the European sovereign debt crisis that followed. The larger developed stock markets, particularly the US, dominate volatility transmission to other markets though the contribution of emerging markets such as China, India and Brazil to global spillovers has increased considerably after 2006. We also find that while the time series of total spillovers is largely unaffected by the choice of volatility measure, there is considerable impact on the results for directional spillovers between stock markets. Finally, we examine potential determinants of net directional spillovers and find that the level of volatility in one stock market relative to that in other stock markets is the most important factor in increasing spillovers transmitted. Volatility in the foreign exchange market and changes in bond yields are also important, depending on the volatility regime at the time. The second study examines the impact of both domestic and international macroeconomic news (news spillovers) on the realized volatility of 15 major stock market indices from both developed and emerging economies. We utilise a total of 198 news variables over the period from 2000-2014 in what may be the most comprehensive study to date on the topic of macroeconomic news and stock market volatility. We find strong evidence of time variation, with some markets responding to news more strongly during the GFC and the post GFC periods while in other markets the impact of news has lessened considerably. We dissect news surprises into positive (higher than market expectation) and negative (lower than market expectation) and find that while the response varies across markets, positive news has a notably stronger impact for US news spillovers to other markets. While domestic news variables are important in many markets, we find strong evidence that spillovers from the largest economies are often equally important if not more so. US news had the greatest impact. News from the UK, Japan and the Eurozone also had a notable impact, as did Chinese news in a number of stock markets. Finally, we also rank the most influential variables across all markets, and find that central bank decisions and PMI manufacturing surveys had the most impact on stock market volatility. The third study examines the impact of macroeconomic news on the realized volatility of 6 of the most highly traded currencies versus the US dollar. We utilise a total of 145 news variables over the period from 2000-2014 in what may be the most comprehensive study to date on the topic of macroeconomic news and foreign exchange (FX) volatility. We find strong evidence of time variation, with some currencies responding to news more during the GFC and the post GFC periods and vice versa. Interestingly, US news had a notably weaker impact on most currencies post GFC. We find that domestic news is most important for the Australian and Canadian Dollars along with the British Pound, while for the Euro, the Swiss Franc and the Japanese Yen, US news had a much greater impact. News spillovers from Japan, Europe (apart from German news) and China were also important. The response to both positive and negative news is very strong, and there are no persistent trends unlike stock markets and their response to positive US news spillovers. Finally, we rank the most important news variables across all currencies and find that while central bank decisions and PMI surveys had a major impact as they did for stock markets, news on inflation (CPI and PPI), labor market indicators, GDP surprises, housing market news and the minutes of US central bank had a much greater impact on FX volatility