Fearing the Fed: How Wall Street Reads Main Street

Tzuo Hann Law, Dongho Song and Amir Yaron
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Tzuo Hann Law: Boston College
Amir Yaron: University of Pennsylvania

No 1632, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Using intraday stock returns around macroeconomic news announcements (MNAs), we find strong evidence of persistent, cyclical variation in the stock market's response to MNA surprises. The response is particularly strong coming out of recessions and is gradually attenuated as the economy expands. We show that this cyclical pattern can be explained by a regime-switching model. In the model, we find that the direction and shape of the market's response reflect the evolution of beliefs about the state of the economy and monetary policy. The risk of an interest rate hike can entirely mitigate (and even reverse) the effect of positive MNA surprises on returns. This mechanism is consistent with the data -- positive MNA surprises coincide with negative stock market returns when there is substantial uncertainty over monetary policy.

Date: 2017
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mst
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Citations: View citations in EconPapers (6)

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Journal Article: Fearing the Fed: How wall street reads main street (2024)
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