The impact of macroeconomic announcements on financial market volatility in India

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.