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Expectation Dispersion, Uncertainty, and the Reaction to News

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  • Benjamin Born
  • Jonas Dovern
  • Zeno Enders

Abstract

Releases of key macroeconomic indicators are closely watched by financial markets. We investigate the role of expectation dispersion and economic uncertainty for the stock-market reaction to indicator releases. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while higher fundamental uncertainty makes this informational content more valuable.

Suggested Citation

  • Benjamin Born & Jonas Dovern & Zeno Enders, 2020. "Expectation Dispersion, Uncertainty, and the Reaction to News," CESifo Working Paper Series 8801, CESifo.
    • Handle: RePEc:ces:ceswps:_8801
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    References listed on IDEAS

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    Cited by:

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    2. Born, Benjamin & Enders, Zeno & Menkhoff, Manuel & Müller, Gernot & Niemann, Knut, 2022. "Firm Expectations and News: Micro v Macro," CEPR Discussion Papers 17768, C.E.P.R. Discussion Papers.
    3. Ambrocio, Gene & Hasan, Iftekhar, 2022. "Belief polarization and Covid-19," Bank of Finland Research Discussion Papers 10/2022, Bank of Finland.
    4. Ambrocio, Gene, 2020. "Inflationary household uncertainty shocks," Research Discussion Papers 5/2020, Bank of Finland.
    5. Perico Ortiz, Daniel, 2023. "Inflation news coverage, expectations and risk premium," FAU Discussion Papers in Economics 05/2023, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
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    More about this item

    Keywords

    expectation dispersion; uncertainty; macroeconomic news; stock market; event study; forecaster disagreement;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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