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Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets

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Author Info

  • Torben G. Andersen

    ()
    (Department of Economics, Northwestern University)

  • Tim Bollerslev

    ()
    (Department of Economics, Duke University)

  • Francis X. Diebold

    ()
    (Department of Economics, University of Pennsylvania)

  • Clara Vega

    ()
    (Department of Finance, University of Rochester)

Abstract

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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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-028.

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Length: 51 pages
Date of creation: 01 Jul 2003
Date of revision: 28 Jun 2004
Handle: RePEc:pen:papers:04-028

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Keywords: Asset Pricing; Macroeconomic News Announcements; Financial Market Linkages; Market Microstructure; High-Frequency Data; Survey Data; Asset Return Volatility; Forecasting;

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