Multifrequency News and Stock Returns
51 Pages Posted: 20 Jun 2005
Date Written: June 14, 2005
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: Suggested Citation