Torben G. Andersen () (Department of Finance, Northwestern University and NBER) Tim Bollerslev () (Departments of Economics and Finance, Duke University and NBER) Francis X. Diebold () (Departments of Economics, Finance and Statistics, University of Pennsylvania and NBER) Clara Vega () (Department of Economics, University of Rochester)
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We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2004/19.
Length: 53 pages Date of creation: 19 Jan 2004 Date of revision: Handle: RePEc:cfs:cfswop:wp200419
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Find related papers by JEL classification: F3 - International Economics - - International Finance F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance G1 - Financial Economics - - General Financial Markets C5 - Mathematical and Quantitative Methods - - Econometric Modeling
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