Abstract
We investigate the response of UK asset prices to a large set of domestic scheduled macroeconomic announcements using data at a daily frequency from 1998 to 2017. Our results are mostly consistent with economic theory and follow two general patterns: (1) a stronger-than-expected economy raises stock returns, causes the home currency to appreciate, makes the yield curve steeper, and lowers the corporate credit quality spread; (2) higher-than-anticipated inflation leads to an appreciation of the domestic currency and raises the slope of the yield curve. Surprises about retail sales, claimant count rate, GDP, and industrial production have the most prevalent effects across the four asset classes in our data set. A large number of macroeconomic announcements increase trading activity in the stock market, whereas there is barely any (only minor) evidence that announcements (surprises) affect the volatility of asset prices. We also document that the effects of macroeconomic surprises are contingent not only upon the state of the economy but also on the state of the stock market (bull vs. bear).
Highlights
The question of what moves asset prices has been at the forefront of the financial economics agenda for the past four decades
If investors believe that the central bank takes stock prices into account when setting its monetary policy (e.g. Rigobon and Sack 2003; Botzen and Marey 2010), they may assume that its reaction to a macroeconomic surprise depends on the state of the stock market, in turn leading to asset price responses that are contingent on the equity market regime
Our analysis of UK data indicates that stock returns, the effective exchange rate, the slope of the yield curve, and the corporate credit quality spread do respond to the surprises contained in scheduled domestic macroeconomic announcements in a manner that is, to a very large extent, consistent with economic theory
Summary
The question of what moves asset prices has been at the forefront of the financial economics agenda for the past four decades. A strand of the literature has focused on investigating to what extent asset prices respond to the surprises contained in scheduled macroeconomic announcements. Previous studies typically focused on a single market, which represents a serious limitation given that, as prior research has advocated, ‘only by considering jointly asset prices that should be differentially affected by updates in different state variables can our understanding of announcement effects be sharpened’ (Faust et al 2007).. Rigobon and Sack 2003; Botzen and Marey 2010), they may assume that its reaction to a macroeconomic surprise depends on the state of the stock market, in turn leading to asset price responses that are contingent on the equity market regime. Since the intensity of these two behavioural biases varies between stock market regimes (Gervais and Odean 2001; Cheng et al 2013), they provide another plausible mechanism for our hypothesis
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