IDEAS home Printed from https://ideas.repec.org/p/fip/fedlwp/2017-011.html
   My bibliography  Save this paper

Systematic Cojumps, Market Component Portfolios and Scheduled Macroeconomic Announcements

Author

Listed:

Abstract

This study provides evidence of common bivariate jumps (i.e., systematic cojumps) between the market index and style-sorted portfolios. Systematic cojumps are prevalent in book-to-market portfolios and hence, their risk cannot easily be diversified away by investing in growth or value stocks. Nonetheless, large-cap firms have less exposure to systematic cojumps than small-cap firms. Probit regression reveals that systematic cojump occurrences are significantly associated with worse-than-expected scheduled macroeconomic announcements, especially those pertaining to the Federal Funds target rate. Tobit regression shows that Federal Funds news surprises are also significantly related to the magnitude of systematic cojumps.

Suggested Citation

  • Robert G. Bowman & Kam Fong Chan & Christopher J. Neely, 2017. "Systematic Cojumps, Market Component Portfolios and Scheduled Macroeconomic Announcements," Working Papers 2017-11, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2017-011
    DOI: 10.20955/wp.2017.011
    as

    Download full text from publisher

    File URL: https://research.stlouisfed.org/wp/2017/2017-011.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://doi.org/10.20955/wp.2017.011
    File Function: https://doi.org/10.20955/wp.2017.011
    Download Restriction: no
    File URL: https://libkey.io/10.20955/wp.2017.011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Faust Jon & Swanson Eric T & Wright Jonathan H, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-31, October.
    3. León, Ángel & Sebestyén, Szabolcs, 2012. "New measures of monetary policy surprises and jumps in interest rates," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2323-2343.
    4. Paulo Maio, 2014. "Another Look at the Stock Return Response to Monetary Policy Actions," Review of Finance, European Finance Association, vol. 18(1), pages 321-371.
    5. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2007. "Roughing It Up: Including Jump Components in the Measurement, Modeling, and Forecasting of Return Volatility," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 701-720, November.
    6. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
    7. 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.
    8. Chen, Long & Petkova, Ralitsa & Zhang, Lu, 2008. "The expected value premium," Journal of Financial Economics, Elsevier, vol. 87(2), pages 269-280, February.
    9. Evans, Kevin P., 2011. "Intraday jumps and US macroeconomic news announcements," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2511-2527, October.
    10. Rangel, José Gonzalo, 2011. "Macroeconomic news, announcements, and stock market jump intensity dynamics," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1263-1276, May.
    11. Lutz Kilian & Clara Vega, 2011. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 660-671, May.
    12. Horowitz, Joel L. & Loughran, Tim & Savin, N. E., 2000. "Three analyses of the firm size premium," Journal of Empirical Finance, Elsevier, vol. 7(2), pages 143-153, August.
    13. Gilder, Dudley & Shackleton, Mark B. & Taylor, Stephen J., 2014. "Cojumps in stock prices: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 443-459.
    14. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    15. Jiang, George J. & Lo, Ingrid & Verdelhan, Adrien, 2011. "Information Shocks, Liquidity Shocks, Jumps, and Price Discovery: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(2), pages 527-551, April.
    16. Dungey, Mardi & Hvozdyk, Lyudmyla, 2012. "Cojumping: Evidence from the US Treasury bond and futures markets," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1563-1575.
    17. Bollerslev, Tim & Law, Tzuo Hann & Tauchen, George, 2008. "Risk, jumps, and diversification," Journal of Econometrics, Elsevier, vol. 144(1), pages 234-256, May.
    18. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    19. repec:bla:jfinan:v:59:y:2004:i:2:p:755-793 is not listed on IDEAS
    20. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    21. repec:bla:jfinan:v:59:y:2004:i:6:p:2809-2834 is not listed on IDEAS
    22. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(4), pages 523-543, December.
    23. John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, vol. 60(2), pages 649-672, April.
    24. Jon Wongswan, 2006. "Transmission of Information across International Equity Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1157-1189.
    25. Moerman, Gerard A. & van Dijk, Mathijs A., 2010. "Inflation risk and international asset returns," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 840-855, April.
    26. Paolo Pasquariello & Clara Vega, 2007. "Informed and Strategic Order Flow in the Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1975-2019, November.
    27. Cenesizoglu, Tolga, 2011. "Size, book-to-market ratio and macroeconomic news," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 248-270, March.
    28. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    29. Christopher J. Neely, 2005. "Using implied volatility to measure uncertainty about interest rates," Review, Federal Reserve Bank of St. Louis, vol. 87(May), pages 407-425.
    30. Jérôme Lahaye & Sébastien Laurent & Christopher J. Neely, 2011. "Jumps, cojumps and macro announcements," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 893-921, September.
    31. Dungey, Mardi & McKenzie, Michael & Smith, L. Vanessa, 2009. "Empirical evidence on jumps in the term structure of the US Treasury Market," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 430-445, June.
    32. Jean Jacod & Viktor Todorov, 2010. "Do price and volatility jump together?," Papers 1010.4990, arXiv.org.
    33. Alessandro Beber & Michael W. Brandt, 2010. "When It Cannot Get Better or Worse: The Asymmetric Impact of Good and Bad News on Bond Returns in Expansions and Recessions," Review of Finance, European Finance Association, vol. 14(1), pages 119-155.
    34. Bhushan, Ravi, 1989. "Firm characteristics and analyst following," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 255-274, July.
    35. Gnabo, Jean-Yves & Hvozdyk, Lyudmyla & Lahaye, Jérôme, 2014. "System-wide tail comovements: A bootstrap test for cojump identification on the S&P 500, US bonds and currencies," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 147-174.
    36. Jiang, George J. & Yao, Tong, 2013. "Stock Price Jumps and Cross-Sectional Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(5), pages 1519-1544, October.
    37. Christophe Croux & Sébastien Laurent, 2011. "Outlyingness Weighted Covariation," Journal of Financial Econometrics, Oxford University Press, vol. 9(4), pages 657-684.
    38. Rama Cont & Yu Hang Kan, 2011. "Dynamic hedging of portfolio credit derivatives," Post-Print hal-00578008, HAL.
    39. Kuntara Pukthuanthong & Richard Roll, 2015. "Internationally Correlated Jumps," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 5(1), pages 92-111.
    40. repec:bla:jfinan:v:53:y:1998:i:1:p:219-265 is not listed on IDEAS
    41. Suzanne S. Lee, 2012. "Jumps and Information Flow in Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 439-479.
    42. Brenner, Menachem & Pasquariello, Paolo & Subrahmanyam, Marti, 2009. "On the Volatility and Comovement of U.S. Financial Markets around Macroeconomic News Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(6), pages 1265-1289, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Cong-Cong & Xu, Hai-Chuan & Zhou, Wei-Xing, 2020. "News coverage and portfolio returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    2. Deniz Erdemlioglu & Christopher J. Neely & Xiye Yang, 2023. "Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications," Working Papers 2023-016, Federal Reserve Bank of St. Louis.
    3. Xiao, Xiao & Zhou, Chen, 2018. "The decomposition of jump risks in individual stock returns," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 207-228.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kam F. Chan & Philip Gray, 2018. "Volatility jumps and macroeconomic news announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 881-897, August.
    2. Kam Fong Chan & Philip Gray, 2017. "Do Scheduled Macroeconomic Announcements Influence Energy Price Jumps?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(1), pages 71-89, January.
    3. Chan, Kam Fong & Powell, John G. & Treepongkaruna, Sirimon, 2014. "Currency jumps and crises: Do developed and emerging market currencies jump together?," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 132-157.
    4. Füss, Roland & Grabellus, Markus & Mager, Ferdinand & Stein, Michael, 2018. "Something in the air: Information density, news surprises, and price jumps," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 50-75.
    5. Zhou, Haigang & Zhu, John Qi, 2019. "Firm characteristics and jump dynamics in stock prices around earnings announcements," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    6. Gilder, Dudley & Shackleton, Mark B. & Taylor, Stephen J., 2014. "Cojumps in stock prices: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 443-459.
    7. Deniz Erdemlioglu & Christopher J. Neely & Xiye Yang, 2023. "Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications," Working Papers 2023-016, Federal Reserve Bank of St. Louis.
    8. Xin Huang, 2018. "Macroeconomic news announcements, systemic risk, financial market volatility, and jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(5), pages 513-534, May.
    9. Serdengeçti, Süleyman & Sensoy, Ahmet & Nguyen, Duc Khuong, 2021. "Dynamics of return and liquidity (co) jumps in emerging foreign exchange markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    10. Rangel, José Gonzalo, 2011. "Macroeconomic news, announcements, and stock market jump intensity dynamics," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1263-1276, May.
    11. Megaritis, Anastasios & Vlastakis, Nikolaos & Triantafyllou, Athanasios, 2021. "Stock market volatility and jumps in times of uncertainty," Journal of International Money and Finance, Elsevier, vol. 113(C).
    12. Wang, Hao & Yue, Mengqi & Zhao, Hua, 2015. "Cojumps in China's spot and stock index futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 541-557.
    13. Lars Winkelmann & Markus Bibinger & Tobias Linzert, 2016. "ECB Monetary Policy Surprises: Identification Through Cojumps in Interest Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 613-629, June.
    14. Smales, L.A., 2021. "Macroeconomic news and treasury futures return volatility: Do treasury auctions matter?," Global Finance Journal, Elsevier, vol. 48(C).
    15. Dungey, Mardi & Henry, Olan T & Hvodzdyk, Lyudmyla, 2013. "The impact of jumps and thin trading on realized hedge ratios," Working Papers 2013-02, University of Tasmania, Tasmanian School of Business and Economics, revised 28 Mar 2013.
    16. Yao, Wenying & Tian, Jing, 2015. "The role of intra-day volatility pattern in jump detection: empirical evidence on how financial markets respond to macroeconomic news announcements," Working Papers 2015-05, University of Tasmania, Tasmanian School of Business and Economics.
    17. Akhtar, Shumi & Akhtar, Farida & Jahromi, Maria & John, Kose, 2017. "Impact of interest rate surprises on Islamic and conventional stocks and bonds," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 218-231.
    18. Paiardini, Paola, 2014. "The impact of economic news on bond prices: Evidence from the MTS platform," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 302-322.
    19. Dungey, Mardi & Erdemlioglu, Deniz & Matei, Marius & Yang, Xiye, 2018. "Testing for mutually exciting jumps and financial flights in high frequency data," Journal of Econometrics, Elsevier, vol. 202(1), pages 18-44.
    20. Nkwoma, Inekwe John, 2017. "Futures-Based Measures Of Monetary Policy And Jump Risk," Macroeconomic Dynamics, Cambridge University Press, vol. 21(2), pages 384-405, March.

    More about this item

    Keywords

    Systematic cojumps; Scheduled macroeconomic announcements; Market component portfolios; federal funds rates;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2017-011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anna Oates (email available below). General contact details of provider: https://edirc.repec.org/data/frbslus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.