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Do financial markets respond to macroeconomic surprises? Evidence from the UK

Do financial markets respond to macroeconomic surprises? Evidence from the UK
Do financial markets respond to macroeconomic surprises? Evidence from the UK
We investigate the response of UK asset prices to a large set of domestic scheduled macroeconomic announcements using data at a daily frequency from 1998 to 2017. Our results are mostly consistent with economic theory and follow two general patterns: (1) a stronger-than-expected economy raises stock returns, causes the home currency to appreciate, makes the yield curve steeper, and lowers the corporate credit quality spread; (2) higher-than-anticipated inflation leads to an appreciation of the domestic currency and raises the slope of the yield curve. Surprises about Retail Sales, Claimant Count Rate, GDP, and Industrial Production have the most prevalent effects across the four asset classes in our data set. A large number of macroeconomic announcements increase trading activity in the stock market, whereas there is barely any (only minor) evidence that announcements (surprises) affect the volatility of asset prices. We also document that the effects of macroeconomic surprises are contingent not only upon the state of the economy but also on the state of the stock market (bull vs. bear).
Macroeconomic announcements, Stock returns, Effective exchange rate, Yield curve, Corporate credit quality spread, Trading volume
0377-7332
Heinlein, Reinhold
056accbf-0687-4487-9bbc-1226ac8f6f8f
Lepori, Gabriele
551865b7-2e3a-4de1-aaf9-6c7f23e32e8d
Heinlein, Reinhold
056accbf-0687-4487-9bbc-1226ac8f6f8f
Lepori, Gabriele
551865b7-2e3a-4de1-aaf9-6c7f23e32e8d

Heinlein, Reinhold and Lepori, Gabriele (2021) Do financial markets respond to macroeconomic surprises? Evidence from the UK. Empirical Economics. (In Press)

Record type: Article

Abstract

We investigate the response of UK asset prices to a large set of domestic scheduled macroeconomic announcements using data at a daily frequency from 1998 to 2017. Our results are mostly consistent with economic theory and follow two general patterns: (1) a stronger-than-expected economy raises stock returns, causes the home currency to appreciate, makes the yield curve steeper, and lowers the corporate credit quality spread; (2) higher-than-anticipated inflation leads to an appreciation of the domestic currency and raises the slope of the yield curve. Surprises about Retail Sales, Claimant Count Rate, GDP, and Industrial Production have the most prevalent effects across the four asset classes in our data set. A large number of macroeconomic announcements increase trading activity in the stock market, whereas there is barely any (only minor) evidence that announcements (surprises) affect the volatility of asset prices. We also document that the effects of macroeconomic surprises are contingent not only upon the state of the economy but also on the state of the stock market (bull vs. bear).

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MacroSurprisesUK-Heinlein&Lepori21 - Accepted Manuscript
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Accepted/In Press date: 29 July 2021
Keywords: Macroeconomic announcements, Stock returns, Effective exchange rate, Yield curve, Corporate credit quality spread, Trading volume

Identifiers

Local EPrints ID: 450702
URI: http://eprints.soton.ac.uk/id/eprint/450702
ISSN: 0377-7332
PURE UUID: c1f537ab-d43f-4beb-b031-2f4d63d22670
ORCID for Gabriele Lepori: ORCID iD orcid.org/0000-0002-2619-227X

Catalogue record

Date deposited: 06 Aug 2021 16:32
Last modified: 28 Jan 2022 02:58

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Contributors

Author: Reinhold Heinlein
Author: Gabriele Lepori ORCID iD

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