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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. [email protected]
Paolo Pasquariello
Affiliation:
Ross School of Business, University of Michigan, 701 Tappan St., Ann Arbor, MI 48109. [email protected]
Marti Subrahmanyam
Affiliation:
Stern School of Business, New York University, 44 West 4th St., New York, NY 10012. [email protected]
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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

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