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The Reaction of Stock Returns to News about Fundamentals

  • Tolga Cenesizoglu
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    This paper analyzes the reaction of stock returns to news about the state of the economy. We develop a general equilibrium asset pricing model where the investor learns about the growth rate of the economy through two sources of information, dividend realizations and regularly scheduled announcements about the state of the economy. We distinguish between dividend news and the unexpected part of the external signal and characterize the reaction of stock returns to news from these two sources of information. We show that the reaction to these news variables can be quite different under different assumptions about their precisions in different states. Our model is able to account for several empirical facts about the reaction of stock returns to news, such as time-varying and state-dependent reaction, asymmetric reaction to extreme news and stronger reaction to more precise signals.

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-32.pdf
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    Paper provided by CIRPEE in its series Cahiers de recherche with number 1032.

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    Date of creation: 2010
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    Handle: RePEc:lvl:lacicr:1032
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    1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
    2. Ben Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    3. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2007. "Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets," CREATES Research Papers 2007-20, School of Economics and Management, University of Aarhus.
    4. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-54, June.
    5. Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
    6. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
    7. 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(04), pages 523-543, December.
    8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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