In the August 2004 update of their paper entitled “Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets”, Torben Andersen, Tim Bollerslev, Francis Diebold and Clara Vega investigate the real-time response of U.S., German and British stock, bond and foreign exchange markets to 25 types of U.S. macroeconomic news (such as GDP, PPI, CPI and unemployment rate). They employ actively traded futures as proxies for each of these markets. They measure the degree of surprise in macroeconomic announcements based on the survey-based expectations of market players. Using data from various starting points in the 1990s through the end of 2002, they find that:
- Macroeconomic news surprises do affect futures pricing, immediately for all practical purposes.
- Stock markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the conventionally-expected negative impact during recessions.
- Opposing “cash flow” and “discount rate” aspects of equity valuation may explain this inconsistency in the impact of macroeconomic news on stock markets. Good news improves cash flow prospects but indicates upward pressure on the discount rate. Bad news depresses cash flow prospects but indicates downward pressure on the discount rate. During recessions (expansions), the cash flow (discount rate) effect dominates. Averaging data across expansions and recessions tends to hide the effects of macroeconomic news on stock markets.
- The impacts of good and bad macroeconomic news for bonds and currencies are stronger, more straightforward and more consistent than for stocks.
In summary, good (bad) macroeconomic news is bad (good) for broad stock indices during expansions and good (bad) during recessions.
