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And Now, The Rest of the News: Volatility and Firm Specific News Arrival

  • Robert F. Engle

    ()

    (Stern School of Business, New York University)

  • Martin Klint Hansen

    ()

    (Aarhus University and CREATES)

  • Asger Lunde

    ()

    (Aarhus University and CREATES)

Starting with the advent of the event study methodology, the puzzle of how public information relates to changes in asset prices has unraveled gradually. Using a sample of 28 large US companies, we investigate how more than 3 million firm specific news items are related to firm specific stock return volatility. We specify a return generating process in conformance with the mixture of distributions hypothesis, where stock return volatility has a public and a private information processing component. Following public information arrival, prices incorporate public information contemporaneously while private processing of public information generates private information that is incorporated sequentially. We refer to this model as the information processing hypothesis of return volatility and test it using time series regression. Our results are evidence that public information arrival is related to increases in volatility and volatility clustering. Even so, clustering in public information does not fully explain volatility clustering. Instead, the presence of significant lagged public information effects suggest private information, generated following the arrival of public information, plays an important role. Including indicators of public information arrival explains an incremental 5 to 20 percent of variation in the changes of firm specific return volatility. Contrary to prior financial information research, our investigation favors the view that return volatility is related to public information arrival.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2012-56.

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Length: 48
Date of creation: 04 Dec 2012
Date of revision:
Handle: RePEc:aah:create:2012-56
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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