Announcements, Expectations, and Stock Returns with Asymmetric Information
52 Pages Posted: 31 Dec 2019 Last revised: 11 Nov 2021
Date Written: October 12, 2021
Revisions of consensus forecasts of macroeconomic variables positively predict announcement day forecast errors, whereas stock market returns on forecast revision 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 partly driven by noise, and therefore negatively predict returns on announcement days when noise is revealed and the market corrects itself.
Keywords: Expectations Formation, Noisy Rational Expectations, Macroeconomic Announcement, Asymmetric Information.
JEL Classification: D80, D83, D84, E37, G11, G12, G14
Suggested Citation: Suggested Citation