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Multifrequency news and stock returns

Listed author(s):
  • Laurent-Emmanuel Calvet

    ()

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Adlai J. Fisher

Equity prices are driven by shocks with persistence levels ranging from intraday horizons to several decades. To accommodate this diversity, we introduce a parsimonious equilibrium model with regime shifts of heterogeneous durations in fundamentals, and estimate specifications with up to 256 states on daily aggregate returns. The multifrequency equilibrium has higher likelihood than the Campbell and Hentschel [1992. No news is good news: an asymmetric model of changing volatility in stock returns. Journal of Financial Economics 31, 281-318] specification, while producing volatility feedback 10 to 40 times larger. Furthermore, Bayesian learning about volatility generates a novel trade-off between skewness and kurtosis as information quality varies, complementing the uncertainty channel [e.g., Veronesi, 1999. Stock market overreaction to bad news in good times: a rational expectations equilibrium model. Review of Financial Studies 12, 975-1007]. Economies with intermediate information best match daily returns.

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Paper provided by HAL in its series Post-Print with number hal-00459675.

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Date of creation: 01 Oct 2007
Publication status: Published in Journal of Financial Economics, Elsevier, 2007, Vol.86, n°1, pp.178-212. <10.1016/j.jfineco.2006.09.001>
Handle: RePEc:hal:journl:hal-00459675
DOI: 10.1016/j.jfineco.2006.09.001
Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00459675
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