The spillover effects of target interest rate news from the U.S. Fed and the European Central Bank on the Asia-Pacific stock markets

Abstract

This paper provides comprehensive evidence on the spillover effects of the U.S. Fed's and the European Central Bank (ECB)'s target interest rate news on the market returns and return volatilities of twelve stock markets in the Asia-Pacific over the period [1999][2000][2001][2002][2003][2004][2005][2006]. The news spillover effects on the returns are generally consistent with the literature where a majority of stock markets shows significant negative returns in response to unexpected rate rises. Whilst the results of the speed of adjustment for the Fed's news are mixed across the markets, the ECB news was absorbed slowly, in general. The return volatilities were higher in response to the interest rate news from both sources. In addition, both the Fed and the ECB news elicited tardy or persisting volatility responses. These findings have important implications for all levels of market participants in the Asia Pacific stock markets. JEL classification: E44; G14; G15Keywords: Target interest rate news; Spillover effects; U.S. Fed; ECB Acknowledgement: We would like to thank Stijn Claessens and an anonymous referee for valuable comments and suggestions that greatly enhanced this paper. The remaining errors, if any, are our own.

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