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Stock market volatility and price discovery : three essays on the effect of macroeconomic information

Abstract

This dissertation investigates the response of the stock market to macroeconomic fundamental information by studying its effects on short and long term patterns of market volatility, and the mechanism through which this information enters stock prices (price discovery process). The first chapter examines the effects of announcement and news on the high frequency dynamics of stock market volatility. The return distribution is parametrized using two orthogonal stochastic processes. One is described by a jump Poisson-Gaussian model with time varying jump intensity. The other follows a standard GARCH(1,1) model. Information surprises and announcements affect conditional volatility through a non-linear channel described by the jump intensity. The day of the announcement, per se, has little impact on jump intensities. In contrast, when the surprise component of the announcement is incorporated into the model, inflation shocks show persistent effects and monetary policy shocks show short-lived effects. The second chapter proposes modeling equity volatilities as a combination of macroeconomic effects and time series dynamics. High frequency return volatility is specified to be the product of a slow moving deterministic component, represented by an exponential spline, and a unit GARCH. This deterministic component is the low frequency volatility, which is then estimated for nearly 50 countries over various sample periods of daily data. Recognizing that the macroeconomy is slowly evolving, macroeconomic determinants of low frequency volatility are investigated. The model allows long horizon forecasts of volatility to depend on macroeconomic developments. The third chapter investigates heterogeneity in the market assessment of public macroeconomic announcements by modeling the price discovery process. Using a structural microstructure framework, the proposed model describes jointly two main venues through which macroeconomic news might enter stock prices: Instantaneous fundamental news impacts consistent with the asset pricing view of symmetric information, and permanent order flow effects consistent with a microstructure view of asymmetric information related to heterogeneous interpretation of public news. Significant instantaneous news impacts are detected for news related to real activity, investment, inflation, and monetary policy; however, significant order flow effects are also observed on employment announcement days

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