Multifrequency News and Stock Returns

51 Pages Posted: 20 Jun 2005

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2005

Abstract

Recent research documents that aggregate stock prices are driven by shocks with persistence levels ranging from daily intervals to several decades. Building on these insights, we introduce a parsimonious equilibrium model in which regime-shifts of heterogeneous durations affect the volatility of dividend news. We estimate tightly parameterized specifications with up to 256 discrete states on daily U.S. equity returns. The multifrequency equilibrium has significantly higher likelihood than the classic Campbell and Hentschel (1992) specification, while generating volatility feedback effects 6 to 12 times larger. We show in an extension that Bayesian learning about stochastic volatility is faster for bad states than good states, providing a novel source of endogenous skewness that complements the uncertainty channel considered in previous literature (e.g., Veronesi, 1999). Furthermore, signal precision induces a tradeoff between skewness and kurtosis, and economies with intermediate investor information best match the data.

Keywords: Multifrequency news, volatility feedback, learning, information quality, endogenous skewness and kurtosis, Epstein-Zin utility

JEL Classification: G12, C22

Suggested Citation

Calvet, Laurent E. and Fisher, Adlai J., Multifrequency News and Stock Returns (June 14, 2005). Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=743444 or http://dx.doi.org/10.2139/ssrn.743444

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Adlai J. Fisher (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8331 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~fisher

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