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Stale information, shocks and volatility

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Author Info
Reint Gropp () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
Arjan Kadareja ()

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Abstract

We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord. JEL Classification: G21, G14.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 686.

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Length: 49 pages
Date of creation: Oct 2006
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Handle: RePEc:ecb:ecbwps:20060686

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Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
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Related research
Keywords: Realised volatility public information transparency.

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  17. Ghysels, E. & Harvey, A. & Renault, E., 1996. "Stochastic Volatility," Cahiers de recherche 9613, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  18. Michael Ehrmann & Marcel Fratzscher, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 354, European Central Bank. [Downloadable!]
  19. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," PIER Working Paper Archive 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004. [Downloadable!]
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  20. Lin, Ji-Chai & Sanger, Gary C & Booth, G Geoffrey, 1995. "Trade Size and Components of the Bid-Ask Spread," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(4), pages 1153-83. [Downloadable!] (restricted)
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  24. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June. [Downloadable!] (restricted)
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  25. Andersen, Torben G. & Bollerslev, Tim & Cai, Jun, 2000. "Intraday and interday volatility in the Japanese stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(2), pages 107-130, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Ehrmann & Marcel Fratzscher, 2007. "Explaining monetary policy in press conferences," Working Paper Series 767, European Central Bank. [Downloadable!]
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