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

Torben Andersen, Tim Bollerslev, Francis Diebold and Clara Vega

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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 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 helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.

Keywords: Asset Pricing; Macroeconomic News Announcements; Financial Market Linkages; Market Microstructure; High-Frequency Data; Survey Data; Asset Return Volatility; Forecasting (search for similar items in EconPapers)
JEL-codes: C5 F3 F4 G1 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2003-07-01, Revised 2004-06-28
New Economics Papers: this item is included in nep-fmk and nep-ifn
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Citations: View citations in EconPapers (83)

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Related works:
Working Paper: Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets (2005)
Working Paper: Real-time price discovery in stock, bond and foreign exchange markets (2004)
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