Economic Forces, Sentiment and Emerging Eastern European Stock Markets

The aim of the current study is to explore the effect of macroeconomic news on stock returns in Eastern European countries, combining market and macroeconomic data over the period of 2000-2009, during which the markets experienced excessive optimistic and pessimistic episodes. Hypothesising the asymmetry in stock price responses to good and bad news, we seek to test its degree under the specific market conditions. The error correction models for each country are extended with fixed effects panel data specification, for capturing the crosssectional effects of the state of the market on the return responses to macroeconomic news. The key methodological problem addressed in recent research is how to relate daily stock data and monthly macroeconomic data. The aggregation of stock returns to monthly averages has several advantages over macroeconomic data disaggregation to irregular frequencies or calendar methods. Since the macroeconomic data is large1, we exploit data mining techniques to reasonably fit the monthly averages of the stock returns and panel data analysis to capture the common patterns typical to Eastern European stock markets. Consistently with prior empirical evidence, we find that the market reacts negatively to news when the market and/or economy is strong, but macroeconomic news is more of a long-term driver, and, therefore, affects trends more than short-run fluctuations.