Preview |
PDF, English
- main document
Download (2MB) | Terms of use |
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.
Document type: | Working paper |
---|---|
Series Name: | AWI Discussion Paper Series |
Volume: | 0739 |
Place of Publication: | Heidelberg |
Date Deposited: | 05 Dec 2023 14:38 |
Date: | 2023 |
Number of Pages: | 51 |
Faculties / Institutes: | The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics |
DDC-classification: | 330 Economics |
Uncontrolled Keywords: | event study, long- and short-term volatility, macroeconomic announcements, stock market response, time-varying risk premia, volatility feedback effect |
Series: | Discussion Paper Series / University of Heidelberg, Department of Economics |