When macroeconomic news announcements bring new information to the financial market, will the market respond? If so, how does it respond? If not, what are the likely reasons? Answers to these questions not only are of great theoretical interest, as they can directly buttress or falsify the efficient market hypothesis in financial economics, and may be useful for studying various macroeconomic questions, but also have important practical implications.
This paper addresses the above questions by separating market responses into continuous volatility and discontinuous jumps, and differentiating the market’s disagreement and uncertainty about the future news release values. I discover significant impacts of macroeconomic news announcements on financial markets, as well as different effects of disagreement and uncertainty on market volatility and jump responses to news announcements.
There is a vast literature studying macroeconomic news announcements and the financial market responses. For the equity market, the empirical evidence in the 1980s and early 1990s, based on monthly or daily data, is mixed and relatively weak. Cutler, Poterba and Summers (1989) find little evidence that the fifty largest daily S&P 500 index returns are linked to important announcements or events from 1946 to 1987, though they detect a negative effect of the inflation rate on the common stock returns. However, Schwert (1981), Pearce and Roley (1985), and Hardouvelis (1987) find a negative effect of monetary policy surprises on stock prices, while inflation surprise has a limited impact.
Surprises in real activity announcements, such as industrial production and the unemployment rate, do not turn out to be significant in Pearce and Roley (1985), but the unemployment rate, trade deficit and personal income are significant in Hardouvelis (1987). In the joint study of market price, volatility, and economic events, Haugen, Talmor and Torous (1993) find negative and asymmetric responses of market price to volatility changes, but they can only identify 28 out of 217 volatility increase periods and 18 out of 224 volatility decrease periods associated with events. Similarly, Fair (2002) only identifies events for 69 days out of 220 days with at least one “large” 1- to 5-minute price change on S&P 500 futures, among which 53 days are related to monetary policy.
Download
PDF Ebook Macroeconomic News Announcements, Financial Market Volatility and Jumps
