When Does the Stock Market Listen to Economic News? New Evidence from Copulas and News Wires
42 Pages Posted: 16 Mar 2015 Last revised: 15 May 2015
Date Written: May 4, 2015
We study association between macroeconomic news and stock market returns using the statistical theory of copulas, and a new comprehensive measure of news based on the indexing of news wires. We find the impact of economic news on equity returns to be nonlinear and asymmetric. In particular, controlling for economic conditions and surprises associated with releases of economic data, we find that the market reacts strongly and negatively to the most unfavourable macroeconomic news, but appears to largely discount the good news. Further, the most-unfavorable news creates price drift, and we document that selling stocks short in the wake of unusually-bad news yields annual abnormal gross returns greater than four percent.
Keywords: copulas, macroeconomic news index, market efficiency, nonlinear dependence, tail dependence
JEL Classification: G14, C58, C51
Suggested Citation: Suggested Citation