Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283465 
Year of Publication: 
2023
Series/Report no.: 
AWI Discussion Paper Series No. 739
Publisher: 
University of Heidelberg, Department of Economics, Heidelberg
Abstract: 
We show that the S&P 500's instantaneous response to surprises in U.S. macroeconomic announcements depends on the level of long-term stock market volatility. When long-term volatility is high, stock returns are more sensitive to news, and there is a pronounced asymmetry in the response to good and bad news. We explain this by combining the Campbell-Shiller log-linear present value framework with a two-component volatility model for the conditional variance of cash flow news and allowing for volatility feedback. In our model, innovations to the long-term volatility component are the most important driver of discount rate news. Large announcement surprises lead to upward revisions in future required returns, which dampens/amplifies the effect of good/bad news.
Subjects: 
event study
long- and short-term volatility
macroeconomic announcements
stock market response
time-varying risk premia
volatility feedback effect
JEL: 
C58
E44
G12
G14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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