Long-Term Volatility Shapes the Stock Market’s Sensitivity to News

Christian Conrad, Julius Schoelkopf and Nikoleta Tushteva ()
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Nikoleta Tushteva: European Central Bank

Working Paper series from Rimini Centre for Economic Analysis

Abstract: We show that the S&P 500’s instantaneous response to surprises in U.S. macroeconomic announcements depends on the level of long-term stock market volatility. When long-term volatility is high, stock returns are more sensitive to news, and there is a pronounced asymmetry in the response to good and bad news. We explain this by combining the Campbell-Shiller log-linear present value framework with a two-component volatility model for the conditional variance of cash flow news and allowing for volatility feedback. In our model, innovations to the long-term volatility component are the most important driver of discount rate news. Large announcement surprises lead to upward revisions in future required returns, which dampens/amplifies the effect of good/bad news.

Keywords: event study; long- and short-term volatility; macroeconomic announcements; stock market response; time-varying risk premia; volatility feedback effect (search for similar items in EconPapers)
JEL-codes: C58 E44 G12 G14 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-fmk and nep-rmg
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http://rcea.org/RePEc/pdf/wp23-16.pdf

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Working Paper: Long-Term Volatility Shapes the Stock Market’s Sensitivity to News (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:23-16

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