Stale Information, Shocks and Volatility
Goethe University Frankfurt; Centre for European Economic Research (ZEW); Goethe University Frankfurt - Department of Finance
European Central Bank (ECB)
ZEW - Centre for European Economic Research Discussion Paper No. 07-012
We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord.
Number of Pages in PDF File: 41
Keywords: Realised volatility, public information, transparency
JEL Classification: G21, G14
Date posted: March 28, 2007 ; Last revised: August 26, 2008
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