Expectation Dispersion, Uncertainty, and the Reaction to News

23 Pages Posted: 14 Jan 2021

See all articles by Benjamin Born

Benjamin Born

Frankfurt School of Finance & Management

Jonas Dovern

Friedrich-Alexander-Universität Erlangen-Nürnberg

Zeno Enders

University of Heidelberg

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

Releases of key macroeconomic indicators are closely watched by financial markets. We investigate the role of expectation dispersion and economic uncertainty for the stock-market reaction to indicator releases. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while higher fundamental uncertainty makes this informational content more valuable.

JEL Classification: E440, G120, G140

Suggested Citation

Born, Benjamin and Dovern, Jonas and Enders, Zeno, Expectation Dispersion, Uncertainty, and the Reaction to News (2020). Available at SSRN: https://ssrn.com/abstract=3765299 or http://dx.doi.org/10.2139/ssrn.3765299

Benjamin Born (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Jonas Dovern

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Zeno Enders

University of Heidelberg ( email )

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