IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/11312.html
   My bibliography  Save this paper

Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets

Author

Listed:
  • Torben G. Andersen
  • Tim Bollerslev
  • Francis X. Diebold
  • Clara Vega

Abstract

We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the U.S. economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing "cash flow" and "discount rate" effects for equity valuation. This finding also helps explain the apparent time-varying correlation between stock and bond returns, and the relatively small equity market news announcement effect when averaged across expansions and recessions. Hence, while our results confirm previous unconditional rankings suggesting that bond markets almost uniformly react most strongly to macroeconomic news, followed by foreign exchange and then equity markets, importantly when conditioning on the state of the economy the foreign exchange and equity markets appear equally responsive. Lastly, relying on the pronounced heteroskedasticity in the new high-frequency data, we also document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.

Suggested Citation

  • Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2005. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," NBER Working Papers 11312, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11312 Note: AP
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w11312.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Wagner, Thomas, 2005. "Environmental policy and the equilibrium rate of unemployment," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 132-156, January.
    2. Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers 97-30, Center for Research in Economics and Statistics.
    3. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
    4. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    5. Rapanos, Vassilis T., 1995. "The effects of environmental taxes on income distribution," European Journal of Political Economy, Elsevier, vol. 11(3), pages 487-501, September.
    6. Parry, Ian W. H., 2004. "Are emissions permits regressive?," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 364-387, March.
    7. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    8. Sebastián Claro, 2002. "A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries," Documentos de Trabajo 226, Instituto de Economia. Pontificia Universidad Católica de Chile..
    9. West, Sarah E. & Williams, R.C.Roberton III, 2004. "Estimates from a consumer demand system: implications for the incidence of environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 47(3), pages 535-558, May.
    10. Swee Chua, 2003. "Does tighter environmental policy lead to a comparative advantage in less polluting goods?," Oxford Economic Papers, Oxford University Press, vol. 55(1), pages 25-35, January.
    11. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
    12. Sebastián Claro, 2003. "A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(120), pages 239-257.
    13. Kevin J. Stiroh & Dale W. Jorgenson, 2000. "U.S. Economic Growth at the Industry Level," American Economic Review, American Economic Association, vol. 90(2), pages 161-167, May.
    14. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association, vol. 50(1), pages 59-88, March.
    15. Vassilis T. Rapanos, 1992. "A Note on Externalities and Taxation," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 226-232, February.
    16. Metcalf, Gilbert E., 1999. "A Distributional Analysis of Green Tax Reforms," National Tax Journal, National Tax Association, vol. 52(4), pages 655-682, December.
    17. Fullerton, Don & Metcalf, Gilbert E., 2001. "Environmental controls, scarcity rents, and pre-existing distortions," Journal of Public Economics, Elsevier, pages 249-267.
    18. A. Lans Bovenberg & Lawrence H. Goulder & Derek J. Gurney, 2005. "Efficiency Costs of Meeting Industry-Distributional Constraints Under Environmental Permits and Taxes," RAND Journal of Economics, The RAND Corporation, pages 950-970.
    19. Lovell, C A Knox, 1973. "CES and VES Production Functions in a Cross-Section Context," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 705-720, May-June.
    20. Vittorio Corbo & Patricio Meller, 1982. "The Substitution of Labor, Skill, and Capital: Its Implications for Trade and Employment," NBER Chapters,in: Trade and Employment in Developing Countries, Volume 2: Factor Supply and Substitution, pages 193-214 National Bureau of Economic Research, Inc.
    21. Mieszkowski, Peter, 1972. "The property tax: An excise tax or a profits tax?," Journal of Public Economics, Elsevier, pages 73-96.
    22. McAusland, Carol, 2003. "Voting for pollution policy: the importance of income inequality and openness to trade," Journal of International Economics, Elsevier, pages 425-451.
    23. McLure, Charles Jr., 1975. "General equilibrium incidence analysis : The Harberger model after ten years," Journal of Public Economics, Elsevier, pages 125-161.
    24. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
    25. Inge Mayeres, 1999. "The Distributional Impacts of Policies for the Control of Transport Externalities.An Applied General Equilibrium Model," Working Papers 1999.8, Fondazione Eni Enrico Mattei.
    26. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association, vol. 50(1), pages 59-88, March.
    27. Ruud de Mooij & A. Bovenberg, 1998. "Environmental Taxes, International Capital Mobility and Inefficient Tax Systems: Tax Burden vs. Tax Shifting," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 7-39.
    28. Metcalf, Gilbert E., 1999. "A Distributional Analysis of Green Tax Reforms," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 655-82, December.
    29. Babiker, Mustafa H. & Metcalf, Gilbert E. & Reilly, John, 2003. "Tax distortions and global climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 269-287, September.
    30. Aidt, Toke S., 1998. "Political internalization of economic externalities and environmental policy," Journal of Public Economics, Elsevier, pages 1-16.
    31. A. Lans Bovenberg & Lawrence H. Goulder, 1995. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes:General Equilibrium Analyses," NBER Working Papers 5117, National Bureau of Economic Research, Inc.
    32. Humphrey, David Burras & Moroney, John R, 1975. "Substitution among Capital, Labor, and Natural Resource Products in American Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 57-82, February.
    33. Carbone, Jared C. & Smith, V. Kerry, 2008. "Evaluating policy interventions with general equilibrium externalities," Journal of Public Economics, Elsevier, pages 1254-1274.
    34. Peter M. Mieszkowski, 1967. "On the Theory of Tax Incidence," Journal of Political Economy, University of Chicago Press, vol. 75, pages 250-250.
    35. Robison, H David, 1985. "Who Pays for Industrial Pollution Abatement?," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 702-706, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

    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:nbr:nberwo:11312. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.