Do Macroeconomic Announcements Cause Asymmetric Volatility?

Abstract

In this paper, we study the impact of macroeconomic news announcements on the conditional volatility of stock and bond returns. Using daily returns on the S&P 500 index, the NASDAQ index, and the 1 and 10 year U.S. Treasury bonds, some interesting results emerge. Announcement shocks appear to have a strong impact on the (dynamics of) bond and stock market volatility. Our results provide empirical evidence that asymmetric volatility in the Treasury bond market can be largely explained by these macroeconomic announcement shocks. This suggests that the asymmetric volatility found in government bond market are likely due to misspecification of the volatility model. Because firm-specific news is the most important source of information in the stock market, the asymmetries in stock volatility do not disappear after incorporating macroeconomic announcements into the volatility model. Moreover, by distinguishing FOMC (interest rate) announcements from PPI and EMP (labor market) announcements, we find that both types of announcements are important determinants in explaining the conditional mean and dynamics in volatility.

Keywords: Multivariate GARCH, stock and bond market, time-varying volatility, asymmetric, macroeconomic announcements

JEL Classification: G12, C22