Aggregated macroeconomic news and price discovery Defended on Thursday, 11 June 2015
Is there a link between asset prices and economic fundamentals? Many studies fail to find a convincing link and conclude that asset prices and economic fundamentals are disconnected. A famous example of the disconnect between exchange rates and macroeconomic fundamentals is presented in Meese and Rogoff (1983). The main success connecting asset prices to economic fundamentals is in very short periods immediately after macroeconomic announcements (e.g. Andersen et al., 2007). However, individual announcements are much less important in the medium term. The reason is that medium term returns are contaminated by other types of news (including economic news) unrelated to the news analyzed.Therefore simultaneously relating medium term asset returns to a large number of economic news announcements can provide means of mitigating contamination. This thesis provides evidence of a strong medium term relation between asset prices and economic fundamentals by using news aggregation and novel methods. While the literature documents that the link between asset prices and economic fundamentals, measured by R-squared,does not exceed eight percent, this thesis shows that the R-squared can be as high as 27 percent.
Macroeconomic news, Asset pricing, Aggregated news, Treasury futures, Currencies, Foreign Exchange, News index, Price Discovery, High frequency data, Surprise Index, Limited attention.
Brazys, J. (2015, June 11). Aggregated Marcoeconomic News and Price Discovery (No. EPS-2015-351-F&A). ERIM Ph.D. Series Research in Management. Erasmus Research Institute of Management. Retrieved from hdl.handle.net/1765/78243