Do financial markets respond to macroeconomic surprises? Evidence from the UK

Reinhold Heinlein () and Gabriele M. Lepori ()
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Reinhold Heinlein: University of the West of England
Gabriele M. Lepori: University of Southampton

Empirical Economics, 2022, vol. 62, issue 5, No 11, 2329-2371

Abstract: Abstract We investigate the response of UK asset prices to a large set of domestic scheduled macroeconomic announcements using data at a daily frequency from 1998 to 2017. Our results are mostly consistent with economic theory and follow two general patterns: (1) a stronger-than-expected economy raises stock returns, causes the home currency to appreciate, makes the yield curve steeper, and lowers the corporate credit quality spread; (2) higher-than-anticipated inflation leads to an appreciation of the domestic currency and raises the slope of the yield curve. Surprises about retail sales, claimant count rate, GDP, and industrial production have the most prevalent effects across the four asset classes in our data set. A large number of macroeconomic announcements increase trading activity in the stock market, whereas there is barely any (only minor) evidence that announcements (surprises) affect the volatility of asset prices. We also document that the effects of macroeconomic surprises are contingent not only upon the state of the economy but also on the state of the stock market (bull vs. bear).

Keywords: Macroeconomic announcements; Stock returns; Effective exchange rate; Yield curve; Corporate credit quality spread; Trading volume (search for similar items in EconPapers)
JEL-codes: C58 G14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-021-02108-1

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