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Multifrequency news and stock returns

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  • Calvet, Laurent E.
  • Fisher, Adlai J.

Abstract

Recent research documents that aggregate stock prices are driven by shocks with persistence levels ranging from daily intervals to several decades. Building on these insights, we introduce a parsimonious equilibrium model in which regime-shifts of heterogeneous durations affect the volatility of dividend news. We estimate tightly parameterized specifications with up to 256 discrete states on daily U.S. equity returns. The multifrequency equilibrium has significantly higher likelihood than the classic Campbell and Hentschel (1992) specification, while generating volatility feedback effects 6 to 12 times larger. We show in an extension that Bayesian learning about stochastic volatility is faster for bad states than good states, providing a novel source of endogenous skewness that complements the "uncertainty" channel considered in previous literature (e.g., Veronesi, 1999). Furthermore, signal precision induces a tradeoff between skewness and kurtosis, and economies with intermediate investor information best match the data.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 86 (2007)
Issue (Month): 1 (October)
Pages: 178-212

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Handle: RePEc:eee:jfinec:v:86:y:2007:i:1:p:178-212

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Web page: http://www.elsevier.com/locate/inca/505576

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Cited by:
  1. Larry Epstein & Emmanuel Farhi & Tomasz Stralezcki, 2013. "How Much Would You Pay to Resolve Long-Run Risk?," Working Paper 106061, Harvard University OpenScholar.
  2. Jensen, Mark J & Maheu, John M, 2013. "Risk, Return and Volatility Feedback: A Bayesian Nonparametric Analysis," MPRA Paper 52132, University Library of Munich, Germany.
  3. Calvet, Laurent-Emmanuel & Czellar , Veronika, 2011. "state-observation sampling and the econometrics of learning models," Les Cahiers de Recherche 947, HEC Paris.
  4. Andrew Ang & Allan Timmermann, 2011. "Regime Changes and Financial Markets," NBER Working Papers 17182, National Bureau of Economic Research, Inc.
  5. Laurent E. Calvet & Adlai J. Fisher, 2006. "Multifrequency Jump-Diffusions: An Equilibrium Approach," NBER Working Papers 12797, National Bureau of Economic Research, Inc.
  6. John Y. Campbell & Stefano Giglio & Christopher Polk & Robert Turley, 2012. "An Intertemporal CAPM with Stochastic Volatility," NBER Working Papers 18411, National Bureau of Economic Research, Inc.
  7. Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 174-196, Spring.
  8. Jason Beeler & John Y. Campbell, 2009. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," NBER Working Papers 14788, National Bureau of Economic Research, Inc.
  9. Calvet, Laurent E. & Fisher, Adlai J., 2007. "Multifrequency news and stock returns," Journal of Financial Economics, Elsevier, vol. 86(1), pages 178-212, October.
  10. John M Maheu & Thomas H McCurdy & Yong Song, 2010. "Components of bull and bear markets: bull corrections and bear rallies," Working Papers tecipa-402, University of Toronto, Department of Economics.
  11. Larry G. Epstein & Emmanuel Farhi & Tomasz Strzaleck, 2013. "How Much Would You Pay to Resolve Long-Run Risk?," Boston University - Department of Economics - Working Papers Series WP2013-002, Boston University - Department of Economics.
  12. Andrew Ang & Jun Liu, 2007. "Risk, Return and Dividends," NBER Working Papers 12843, National Bureau of Economic Research, Inc.

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