Long-Term Volatility Shapes the Stock Market's Sensitivity to News

53 Pages Posted: 28 Nov 2023 Last revised: 13 Feb 2024

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Julius Schoelkopf

Heidelberg University - Alfred Weber Institute for Economics

Nikoleta Tushteva

European Central Bank (ECB)

Date Written: November 14, 2023

Abstract

We show that the S&P 500's instantaneous response to surprises in U.S. macroeconomic announcements depends on the level of long-term stock market volatility. When long-term volatility is high, stock returns are more sensitive to news, and there is a pronounced asymmetry in the response to good and bad news. We explain this by combining the Campbell-Shiller log-linear present value framework with a two-component volatility model for the conditional variance of cash flow news and allowing for volatility feedback. In our model, innovations to the long-term volatility component are the most important driver of discount rate news. Large announcement surprises lead to upward revisions in future required returns, which dampens/amplifies the effect of good/bad news.

Keywords: Event study, long- and short-term volatility, macroeconomic announcements, stock market response, time-varying risk premia, volatility feedback effect

JEL Classification: C58, E44, G12, G14

Suggested Citation

Conrad, Christian and Schoelkopf, Julius Theodor and Tushteva, Nikoleta, Long-Term Volatility Shapes the Stock Market's Sensitivity to News (November 14, 2023). Available at SSRN: https://ssrn.com/abstract=4632733 or http://dx.doi.org/10.2139/ssrn.4632733

Christian Conrad (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Julius Theodor Schoelkopf

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Nikoleta Tushteva

European Central Bank (ECB)

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