Macroeconomic news announcements, systemic risk, financial market volatility, and jumps

Abstract

I study the second‐moment response to macroeconomic news announcements in financial markets. Responses can be decomposed into contributions from continuous volatility and discrete jumps. Disagreement and uncertainty are introduced to measure the second moments of market forecasts. Two decades of high frequency equity and bond futures data are examined including the global financial crisis. I report evidence that uncertainty has a stronger effect on the second‐moment response than disagreement and the second‐moment response is influenced by the level of financial stress and monetary policy regime. The zero‐lower‐bound interest rate policy constrains second‐moment responses in the bond market.

The impacts of public news announcements on intraday implied volatility dynamics

“…Consistent with our findings reported in Table and Johnson and So's () results, the put‐implied volatility tends to respond strongly to macroeconomic news announcements, but this response quickly disappears for announcements during nontrading hours in the crisis and postcrisis periods. Overall, our result is consistent with Huang's () findings for the US equity and bond markets that the effect of news in the market volatility and jump responses differs between crisis and noncrisis periods.…”

Volatility jumps and macroeconomic news announcements

“…From the tick data, we construct equally‐spaced, 5‐min log price returns as required for Andersen et al () RV estimator. Consistent with recent related studies (Huang, ; Lahaye et al, ; Miao, Ramchander, & Zumwalt, ), we use open outcry futures data to estimate returns from 8:25 to 15:00 Eastern Standard Time (EST) for the Treasury bond series, and from 8:25 to 16:15 EST for SP. We exclude days associated with public holidays or when the Treasury (SP) futures price has been stale for at least three (two) consecutive hours.…”

“…Further, a number of studies suggest that news about unemployment and inflation are key factors affecting U.S. financial markets (Balduzzi, Elton, & Green, ; Jones, Lamont, & Lumsdaine, ; Savor & Wilson, , ). Similarly, Andersen and Bollerslev (), Wongswan (), and Huang () regard NFP as the “king of all announcements” because most asset prices and price jumps are highly sensitive to its release.…”

“…By and large, this body of work studies the impact of macroeconomic news on the price/level of the asset. There is also considerable evidence that macroeconomic announcements are related to price jumps (Beber & Brandt, ; Chan & Gray, ; Huang, ; Lahaye, Laurent, & Neely, ; Rangel, ). However, a less obvious channel through which news can exert influence is via volatility jumps.…”

“…We focus on a set of four influential macroeconomic variables: the Federal Open Market Committee's (FOMCs) announcement of the target Federal Funds rate, non‐farm payroll (NFP), the unemployment rate, and the producer price index (PPI). Noting that prior studies have shown that the release of these economic reports significantly impacts jumps in asset prices (Beber & Brandt, ; Chan & Gray, ; Huang, ; Rangel, ), it is plausible that these same news releases also drive volatility jumps. To assess the impact of macroeconomic news announcements across different financial assets, we test for volatility jumps in a range of U.S. Treasury securities and the S&P500 equity index.…”