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Fearing the Fed: How Wall Street Reads Main Street

Jacobs Levy Equity Management Center for Quantitative Financial Research Paper

44 Pages Posted: 30 Nov 2019

See all articles by Amir Yaron

Amir Yaron

Bank of Israel; University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Tzuo Hann Law

affiliation not provided to SSRN

Dongho Song

Johns Hopkins University - Carey Business School

Date Written: November 30, 2019

Abstract

We document a countercyclical sensitivity of the stock market to major macroeconomic news announcements. Stock prices react more to (either good or bad) announcement surprises when the economy is below its potential trend with the expectation of easing policy. Based on comprehensive regression analyses and a no-arbitrage asset pricing model with state-dependent dynamics of cash flows (dividends), interest rates (monetary policy), and risk premium (market price of risk), we argue that this cyclical pattern is driven by the procyclical nature of monetary policy expectation and countercyclical nature of market price of risk.

Keywords: Macroeconomic news announcements, cyclical return variation, monetary policy expectations, business cycle, news decomposition, risk premium

JEL Classification: G12, E30, E40, E50

Suggested Citation

Yaron, Amir and Yaron, Amir and Law, Tzuo Hann and Song, Dongho, Fearing the Fed: How Wall Street Reads Main Street (November 30, 2019). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3689924 or http://dx.doi.org/10.2139/ssrn.3689924

Amir Yaron (Contact Author)

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tzuo Hann Law

affiliation not provided to SSRN

Dongho Song

Johns Hopkins University - Carey Business School ( email )

Baltimore, MD 20036-1984
United States

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