DOMESTIC OR U.S. NEWS: WHAT DRIVES CANADIAN FINANCIAL MARKETS?

Using a generalized autoregressive conditional heteroscedasticity (GARCH) model, we study the effects of Canadian and U.S. central bank communication and macroeconomic news on Canadian bond, stock, and foreign exchange market returns and volatility. First, Canadian central bank communication is more relevant than its U.S. counterpart, whereas in the case of macro news, that originating from the United States dominates. Second, we find evidence that the impact of Canadian news reaches its maximum when the Canadian target rate departs from the U.S. target rate (2002–2004) and thereafter. The introduction of fixed announcement dates initially does not cause a noticeable break in the data. (JEL E52, G14, G15)