The Reaction of Stock Returns to News About Fundamentals

Tolga Cenesizoglu ()
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Tolga Cenesizoglu: Department of Finance, HEC Montréal, Montréal, Quebec H3T 2A7, Canada; and CIRPÉE, Montréal, Quebec H3T 2A7, Canada

Management Science, 2015, vol. 61, issue 5, 1072-1093

Abstract: In good times, stock prices react negatively to good news and positively to bad news, whereas in bad times, they react positively to good news and negatively to bad news. To account for this stylized fact, we consider an asset pricing model where the dividend growth rate switches between different values depending on the underlying state of the economy. Investors never observe the true dividend growth rate, but learn about it through not only its realizations but also external signals such as macroeconomic indicators. Under plausible assumptions, the differing precision of external signals across different states of the economy can change the sign of the market reaction to news from external signals in good and bad times. This paper was accepted by Brad Barber, finance.

Keywords: asset pricing; regime switching fundamentals; learning; asymmetric reaction; time-varying external signal precision; good and bad times (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:61:y:2015:i:5:p:1072-1093

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