PhD Defence: Aggregated Macroeconomic News and Price Discovery

In his dissertation ‘Aggregated Macroeconomic News and Price Discovery’ ERIM’s Justinas Brazys examines market distortions created by the speed of information dissemination with special attention paid to high frequency traders who account for a substantial component of price volatility. Justinas demonstrates that pieces of news can have either positive or negative consequences for high-risk assets and that international economic data is disseminated far slower than domestic economic data, providing avenues which even slow traders can benefit from.

Justinas defended his dissertation in the Senate Hall at Erasmus University Rotterdam on Thursday, 11 June 2015. His supervisor was Professor Willem Verschoor (Vrij Universiteit Amsterdam) and his co-supervior was Dr. Martin Martens (EUR). Other members of the Doctoral Committee included Professor Mathijs van Dijk (ERIM), Professor Dick van Dijk (ERIM), and Professor Han Smit (ERIM).

About Justinas Brazys

Justinas Brazys (1986) obtained his BSc. degree in Statistics (2009) at the Vilnius University and his master’s degree in Quantitative Finance and Actuarial Science at the Tilburg University (2010, cum laude). In 2011 he continued his studies as a PhD-candidate at the Erasmus Research Institute of Management (ERIM) - joint research institute of Erasmus School of Economics (ESE) and Rotterdam School of Management (RSM) the Department of Business Economics. His work has been presented at numerous international academic conferences, including Australasian Banking and Finance in Sydney, Australia (2012, 2013), and European Financial Management Association meetings in Reading, UK (2013) and Rome, Italy (2014).

Thesis Abstract

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.

Photos: Chris Gorzeman / Capital Images