Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets

Abstract

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.

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

“…This study includes 26 macroeconomic news announcements. They are listed in Table , covering the 25 announcements studied in Andersen, Bollerslev, Diebold, et al (), plus retail sales excluding automobiles (RSXAUT), as it is one of the four major announcements that EDs were traded on.…”

“…Third, specific to equity prices, there are two competing factors: cash flows and discount rates. As argued by McQueen and Roley () and later confirmed by Andersen, Bollerslev, Diebold, and Vega () and Andersen, Bollerslev, Diebold, and Vega (), these two components are usually affected by a news announcement in the same direction, and the net effect depends on their relative magnitudes. This offsetting effect thus makes it harder to detect equity market responses than bond market responses.…”

Market Quality around Macroeconomic News Announcements: Evidence from the US and Canadian Markets

“…For US announcements, given the large number of data releases, we restrict our sample to the 22 most relevant items. This is in line with the literature in this area (e.g., Balduzzi et al ; Andersen et al ). From these major announcements, the GDP‐related announcements are released quarterly, the federal funds rate is released every 6 weeks, and all the remaining announcements are released monthly.…”

Business Cycle Forecasts and their Implications for High Frequency Stock Market Returns

“…After a large price movement Hamelink (2003) finds a persistent trend and a clear rebound some periods after the initial movements. Andersen et al (2007) show that stock markets react differently to good news than to bad news depending on the state of economy. Studies on forecasting stock market returns and volatility benefit from the findings on the announcement effect of macro news.…”