Announcements, Expectations, and Stock Returns with Asymmetric Information

Abstract

Revisions of consensus forecasts of macroeconomic variables positively predict announcement-day forecast errors, whereas stock market returns on forecast re- vision days predict announcement-day returns in the opposite direction. A dynamic noisy rational expectations model with periodic macroeconomic announcements quantitatively accounts for these findings. Under asymmetric information, average beliefs are not Bayesian: they underweight new information and positively predict subsequent belief errors. In addition, stock prices are partially driven by noise. Noise accumulates into stock prices on revision days but gets corrected upon announcements. Therefore, price changes on revision days negatively predict announcement-day returns.

Keywords: Macroeconomic Announcement, Expectations Formation, Noisy Rational Expectations, Learning, Trading Volume

JEL Classification: D80, D83, D84, E37, G11, G12, G14