Caught by Surprise: How Markets Respond to Macroeconomic News
70 Pages Posted: 6 Apr 2022 Last revised: 21 Mar 2023
Date Written: March 16, 2022
We develop a novel real-time metric of macroeconomic surprises across hundreds of macroeconomic series and examine surprises across the globe. Economic surprises display sizable short-term momentum, driven by predictable errors in consensus forecasts. Forecasts display underreaction to a series' own time-series behavior and information contained in other releases. The 'economic surprise momentum' is especially strong in economic growth measures and is creating sizable and significant return predictability in risky asset classes (equities, credits, commodities). Our results align with aggregate underreaction by macroeconomic forecasters and investors.
Keywords: Macroeconomic news, Surprises, Return Predictability, Momentum
JEL Classification: G12, G15, G40
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