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Expectation dispersion, uncertainty, and the reaction to news

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  • Born, Benjamin
  • Dovern, Jonas
  • Enders, Zeno

Abstract

Key macroeconomic indicator releases are closely monitored by financial markets. We examine the impact of expectation dispersion and economic uncertainty on the stock market’s reaction to these indicators. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Higher uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while fundamental uncertainty makes their informational content more valuable.

Suggested Citation

  • Born, Benjamin & Dovern, Jonas & Enders, Zeno, 2023. "Expectation dispersion, uncertainty, and the reaction to news," European Economic Review, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000697
    DOI: 10.1016/j.euroecorev.2023.104440
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    Cited by:

    1. Born, Benjamin & Enders, Zeno & Menkhoff, Manuel & Müller, Gernot & Niemann, Knut, 2022. "Firm Expectations and News: Micro v Macro," CEPR Discussion Papers 17768, C.E.P.R. Discussion Papers.
    2. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Research Discussion Papers 5/2020, Bank of Finland.
    3. Yang, Ya & Zhou, Mengru & Hou, Yawei & Tang, Run & Liu, Bo & Deng, Yue, 2023. "Examining the impacts of implicit economic policy on urban environmental pollution: Unveiling pathways for sustainable recovery," Resources Policy, Elsevier, vol. 85(PA).
    4. Ambrocio, Gene & Hasan, Iftekhar, 2022. "Belief polarization and Covid-19," Bank of Finland Research Discussion Papers 10/2022, Bank of Finland.
    5. Perico Ortiz, Daniel, 2023. "Inflation news coverage, expectations and risk premium," FAU Discussion Papers in Economics 05/2023, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
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    More about this item

    Keywords

    Expectation dispersion; Uncertainty; Macroeconomic news; Stock market; Event study; Forecaster dispersion;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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