Hostname: page-component-8448b6f56d-mp689 Total loading time: 0 Render date: 2024-04-18T21:07:18.069Z Has data issue: false hasContentIssue false
  • English
  • Français

On the Volatility and Comovement of U.S. Financial Markets around Macroeconomic News Announcements

Published online by Cambridge University Press:  08 October 2009

Menachem Brenner ,
Paolo Pasquariello  and
Marti Subrahmanyam
Menachem Brenner
Affiliation:
Stern School of Business, New York University, 44 West 4th St., New York, NY 10012. mbrenner@stern.nyu.edu
Paolo Pasquariello
Affiliation:
Ross School of Business, University of Michigan, 701 Tappan St., Ann Arbor, MI 48109. ppasquar@bus.umich.edu
Marti Subrahmanyam
Affiliation:
Stern School of Business, New York University, 44 West 4th St., New York, NY 10012. msubrahm@stern.nyu.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

The objective of this paper is to provide a deeper insight into the links between financial markets and the real economy. To that end, we study the short-term anticipation and response of U.S. stock, Treasury, and corporate bond markets to the first release of surprise U.S. macroeconomic information. Specifically, we focus on the impact of these announcements not only on the level, but also on the volatility and comovement of those assets’ returns. We do so by estimating several extensions of the parsimonious multivariate GARCH-DCC model of Engle (2002) for the excess holding-period returns on seven portfolios of these asset classes. We find that both the process of price formation in each of those financial markets and their interaction appear to be driven by fundamentals. Yet our analysis reveals a statistically and economically significant dichotomy between the reaction of the stock and bond markets to the arrival of unexpected fundamental information. We also show that the conditional mean, volatility, and comovement among stock, Treasury, and corporate bond returns react asymmetrically to the information content of these surprise announcements. Overall, the above results shed new light on the mechanisms by which new information is incorporated into prices within and across U.S. financial markets.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 6 , December 2009 , pp. 1265 - 1289
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Andersen, T.; Bollerslev, T.; Diebold, F.; and Labys, P.. “Modeling and Forecasting Realized Volatility.” Econometrica, 71 (2003), 579–625.CrossRefGoogle Scholar
Andersen, T.; Bollerslev, T.; Diebold, F.; and Vega, C.. “Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange.” American Economic Review, 93 (2003), 38–62.CrossRefGoogle Scholar
Andersen, T.; Bollerslev, T.; Diebold, F.; and Vega, C.. “Real-Time Price Discovery in Global Stock, Bond, and Foreign Exchange Markets. Journal of International Economics, 73 (2007), 251–277.CrossRefGoogle Scholar
Andersen, T.; Bollerslev, T.; and Meddahi, N.. “Correcting the Errors: Volatility Forecast Evaluation Using High-Frequency Data and Realized Volatilities.” Econometrica, 73 (2005), 279–296.CrossRefGoogle Scholar
Ang, A.; Piazzesi, M.; and Wei, M.. “What Does the Yield Curve Tell Us about GDP Growth?” Journal of Econometrics, 131 (2006), 359–403.CrossRefGoogle Scholar
Bai, X.; Russell, J.; and Tiao, G.. “Effects of Non-Normality and Dependence on the Precision of Variance Estimates Using High-Frequency Financial Data.” Working Paper, University of Chicago (2004).Google Scholar
Balduzzi, P.; Elton, E.; and Green, C.. “Economic News and Bond Prices: Evidence from the U.S. Treasury Market.” Journal of Financial and Quantitative Analysis, 36 (2001), 523–543.CrossRefGoogle Scholar
Bernanke, B., and Kuttner, K.. “What Explains the Stock Market’s Reaction to Federal Reserve Policy?” Journal of Finance, 60 (2005), 1221–1257.CrossRefGoogle Scholar
Bollerslev, T. “Generalized Autoregressive Conditional Heteroskedasticity.” Journal of Econometrics, 31 (1986), 307–327.CrossRefGoogle Scholar
Bollerslev, T., and Wooldridge, J.. “Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariances.” Econometric Reviews, 11 (1992), 143–172.CrossRefGoogle Scholar
Bomfim, A. “Pre-Announcement Effects, News Effects, and Volatility: Monetary Policy and the Stock Market.” Journal of Banking & Finance, 27 (2003), 133–151.CrossRefGoogle Scholar
Bomfim, A., and Reinhart, V.. “Making News: Financial Market Effects of Federal Reserve Disclosure Practices.” Working Paper, International Monetary Fund (2000).CrossRefGoogle Scholar
Boukus, E., and Rosenberg, J.. “The Information Content of FOMC Minutes.” Working Paper, Federal Reserve Bank of New York (2006).CrossRefGoogle Scholar
Boyd, J.; Hu, J.; and Jagannathan, R.. “The Stock Market’s Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks?” Journal of Finance, 60 (2005), 649–672.CrossRefGoogle Scholar
Brandt, M., and Kavajecz, K.. “Price Discovery in the U.S. Treasury Market: The Impact of Order Flow and Liquidity on the Yield Curve.” Journal of Finance, 59 (2004), 2623–2654.CrossRefGoogle Scholar
Cajigas, J., and Urga, G.. “Dynamic Conditional Correlation Models with Asymmetric Multivariate Laplace Innovations.” Working Paper, City University London (2009).Google Scholar
Cappiello, L.; Engle, R.; and Sheppard, K.. “Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns.” Journal of Financial Econometrics, 4 (2006), 537–572.CrossRefGoogle Scholar
Chapman, D., and Pearson, N.. “Is the Short Rate Drift Actually Nonlinear?” Journal of Finance, 55 (2000), 355–388.CrossRefGoogle Scholar
Chowdhry, B., and Nanda, V.. “Multimarket Trading and Market Liquidity.” Review of Financial Studies, 4 (1991), 483–511.CrossRefGoogle Scholar
Christiansen, C., and Ranaldo, A.. “Realized Bond-Stock Correlation: Macroeconomic Announcement Effects.” Journal of Futures Markets, 27 (2007), 439–469.CrossRefGoogle Scholar
Connolly, R.; Stivers, C.; and Sun, L.. “Stock Market Uncertainty and the Stock-Bond Return Relation.” Journal of Financial and Quantitative Analysis, 40 (2005), 161–194.CrossRefGoogle Scholar
Connolly, R.; Stivers, C.; and Sun, L.. “Commonality in the Time-Variation of Stock–Stock and Stock–Bond Return Comovements.” Journal of Financial Markets, 10 (2007), 192–218.CrossRefGoogle Scholar
Connolly, R., and Wang, A.. “On Stock Market Return Co-Movements: Macroeconomic News, Dispersion of Beliefs, and Contagion.” Pacific-Basin Finance Journal, 11 (2003), 23–43.CrossRefGoogle Scholar
Diether, K.; Malloy, C.; and Scherbina, A.. “Differences of Opinion and the Cross Section of Stock Returns.” Journal of Finance, 57 (2002), 2113–2141.CrossRefGoogle Scholar
Engle, R. ARCH: Selected Readings. New York, NY: Oxford University Press (1995).CrossRefGoogle Scholar
Engle, R. “Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models.” Journal of Business and Economic Statistics, 20 (2002), 339–350.CrossRefGoogle Scholar
Engle, R.; and Sheppard, K.. “Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH.” Working Paper No. 8554, NBER (2001).Google Scholar
Fama, E. “Risk, Return, and Equilibrium.” Journal of Political Economy, 79 (1971), 30–55.CrossRefGoogle Scholar
Figlewski, S., and Wachtel, P.. “The Formation of Inflationary Expectations.” Review of Economics and Statistics, 63 (1981), 1–10.CrossRefGoogle Scholar
Flannery, M., and Protopapadakis, A.. “Macroeconomic Factors Do Influence Aggregate Stock Returns.” Review of Financial Studies, 15 (2002), 751–782.CrossRefGoogle Scholar
Fleming, J.; Kirby, C.; and Ostdiek, B.. “Information and Volatility Linkages in the Stock, Bond, and Money Markets.” Journal of Financial Economics, 49 (1998), 111–137.CrossRefGoogle Scholar
Fleming, M. “Measuring Treasury Market Liquidity.” Economic Policy Review, Federal Reserve Bank of New York, 9 (2003), 83–108.Google Scholar
Fleming, M., and Piazzesi, M.. “Monetary Policy Tick-by-Tick.” Working Paper, Federal Reserve Bank of New York (2005).Google Scholar
Fleming, M., and Remolona, E.. “Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 1901–1915.CrossRefGoogle Scholar
Forbes, K., and Rigobon, R.. “No Contagion, Only Interdependence: Measuring Stock Market Co-Movements.” Journal of Finance, 57 (2002), 2223–2261.CrossRefGoogle Scholar
Foster, F., and Viswanathan, S.. “The Effect of Public Information and Competition on Trading Volume and Price Volatility.” Review of Financial Studies, 6 (1993), 23–56.CrossRefGoogle Scholar
Gertler, M., and Lown, C.. “The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications.” Oxford Review of Economic Policy, 15 (1999), 132–150.CrossRefGoogle Scholar
Green, C. “Economic News and the Impact of Trading on Bond Prices.” Journal of Finance, 59 (2004), 1201–1233.CrossRefGoogle Scholar
Hasbrouck, J. Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading. New York, NY: Oxford University Press (2006).Google Scholar
Jones, C.; Lamont, O.; and Lumsdaine, R.. “Macroeconomic News and Bond Market Volatility.” Journal of Financial Economics, 47 (1998), 315–337.CrossRefGoogle Scholar
Kallberg, J., and Pasquariello, P.. “Time-Series and Cross-Sectional Excess Comovement in Stock Indexes.” Journal of Empirical Finance, 15 (2008), 481–502.CrossRefGoogle Scholar
Karolyi, G., and Stulz, R.. “Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements.” Journal of Finance, 51 (1996), 951–986.Google Scholar
Kim, S.; McKenzie, M.; and Faff, R.. “Macroeconomic News Announcements and the Role of Expectations: Evidence for US Bond, Stock and Foreign Exchange Markets.” Journal of Multinational Financial Management, 14 (2004), 217–232.CrossRefGoogle Scholar
King, M., and Wadhwani, S.. “Transmission of Volatility between Stock Markets.” Review of Financial Studies, 3 (1990), 5–33.CrossRefGoogle Scholar
Kodres, L., and Pritsker, M.. “A Rational Expectations Model of Financial Contagion.” Journal of Finance, 57 (2002), 769–799.CrossRefGoogle Scholar
Kroner, K., and Ng, V.. “Modeling Asymmetric Comovements of Asset Returns.” Review of Financial Studies, 11 (1998), 817–844.CrossRefGoogle Scholar
Krueger, A., and Fortson, K. N. “Do Markets Respond More to More Reliable Labor Market Data? A Test of Market Rationality.” Journal of the European Economic Association, 14 (2003), 931–957.CrossRefGoogle Scholar
Krueger, J., and Kuttner, K.. “The Fed Funds Futures Rate as a Predictor of Federal Reserve Policy.” Journal of Futures Markets, 16 (1996), 865–879.3.0.CO;2-K>CrossRefGoogle Scholar
Kuttner, K. “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market.” Journal of Monetary Economics, 47 (2001), 523–544.CrossRefGoogle Scholar
Kyle, A., and Xiong, W.. “Contagion as a Wealth Effect.” Journal of Finance, 56 (2001), 1401–1440.CrossRefGoogle Scholar
Li, L., and Engle, R.. “Macroeconomic Announcements and Volatility of Treasury Futures.” Working Paper, University of California, San Diego (1998).Google Scholar
Nelson, D., and Foster, D.. “Asymptotic Filtering Theory for Univariate ARCH Models.” Econometrica, 62 (1994), 1–41.CrossRefGoogle Scholar
Pasquariello, P. “Imperfect Competition, Information Heterogeneity, and Financial Contagion.” Review of Financial Studies, 20 (2007), 391–426.CrossRefGoogle Scholar
Pasquariello, P., and Vega, C.. “Informed and Strategic Order Flow in the Bond Markets.” Review of Financial Studies, 20 (2007), 1975–2019.CrossRefGoogle Scholar
Piazzesi, M., and Swanson, E.. “Futures Prices as Risk-Adjusted Forecasts of Monetary Policy.” Journal of Monetary Economics, 55 (2008), 677–691.CrossRefGoogle Scholar
Pindyck, R., and Rotemberg, J.. “The Excess Co-Movement of Commodity Prices.” Economic Journal, 100 (1990), 1173–1189.CrossRefGoogle Scholar
Pindyck, R., and Rotemberg, J.. “The Comovement of Stock Prices.” Quarterly Journal of Economics, 108 (1993), 1073–1104.CrossRefGoogle Scholar
Ross, S. “Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy.” Journal of Finance, 44 (1989), 1–17.Google Scholar
Shiller, R. “Comovements in Stock Prices and Comovements in Dividends.” Journal of Finance, 44 (1989), 719–729.CrossRefGoogle Scholar
Urich, T., and Wachtel, P.. “The Effects of Information and Money Supply Announcements on Interest Rates.” Journal of Finance, 39 (1984), 1177–1188.CrossRefGoogle Scholar
Vega, C. “Stock Price Reaction to Public and Private Information.” Journal of Financial Economics, 82 (2006), 103–133.CrossRefGoogle Scholar
Veronesi, P. “Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model.” Review of Financial Studies, 12 (1999), 975–1007.CrossRefGoogle Scholar