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The IUP Journal of Applied Finance

The Impact of Macroeconomic Announcements on Financial Market Volatility in India

Article Details

Pub. Date	:April, 2019
Product Name	: The IUP Journal of Applied Finance
Product Type	: Article
Product Code	: IJAF41904
Author Name	: Y V Reddy, Varsha B Ingalhalli and Hersch Sahay
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 20

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Abstract

In recent years, stock markets have gained importance as an investment option; commodity markets along with foreign exchange markets too have gained equal importance. Moreover, macroeconomic news has long been considered to play a key role in the pricing of securities. This is true in the case of developing nations, as the limits imposed through macroeconomic interdependence place a burden on their socioeconomic and political base. This impact of announcement on stock market prices (returns), foreign exchange rates (returns) and commodity markets (returns) has been well studied in financial economic literature, than on the volatility of financial markets. Thus, the study using GARCH models tries to analyze the impact of scheduled macroeconomic variables announcement on the volatility of markets, which would be well known to the investors in advance. The results indicate that among the six scheduled macroeconomic variables considered for the study, GDP announcement reduces the volatility of stock market and foreign exchange market. Similarly, inflation announcement reduces the volatility, and index of industrial production increases the volatility of foreign exchange market. Also, fiscal deficit announcement increases the volatility in both commodity market and foreign exchange market. Hence, it is suggested that investors keep a close watch on these significant announcements, so that they can take advantage of price changes (returns) in each market which will have an effect on their portfolio returns.

Description

In recent years, emerging markets have become investment hubs for many foreign investors with potential high rate of return and reduced risk. While stock markets have gained importance as an investment option, commodity markets along with foreign exchange market too have gained equal importance. Earlier, investors rarely considered investing in foreign exchange and commodity markets, but as the stock markets got volatile, investors started hedging their portfolio risks by diversifying their investments into commodity market, bond market and foreign exchange markets. As proved by Varsha et al. (2016), commodity markets are not highly integrated with stock market, thereby allowing the investors to take advantage of the situation to earn returns even when the stock market might not be in good health. Before considering diversifying into various markets, investors should also consider understanding the impact of macroeconomic news announcements on the volatility of each market.