WWW.DISSERTATION.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Dissertations, online materials
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 | 5 |   ...   | 6 |

«MULTIFREQUENCY NEWS AND STOCK RETURNS Laurent E. Calvet Adlai J. Fisher Working Paper 11441 NATIONAL BUREAU OF ...»

-- [ Page 1 ] --

NBER WORKING PAPER SERIES

MULTIFREQUENCY NEWS AND STOCK RETURNS

Laurent E. Calvet

Adlai J. Fisher

Working Paper 11441

http://www.nber.org/papers/w11441

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue

Cambridge, MA 02138

June 2005

Calvet: Department of Finance and Economics, HEC School of Managament, 78351 Jouy-en-Josas Cedex, France, and NBER, calvet@hec.fr. Fisher: Sauder School of Business, University of British Columbia, 2053 Main Hall, Vancouver, BC V6T 1Z2, adlaifisher@sauder.ubc.ca. We received helpful comments from Andrew Abel, John Campbell, John Geanakoplos, Bruno Solnik, Robert Stambaugh, Amir Yaron, Jessica Wachter, and seminar participants at CREST, Paris I Panthéon-Sorbonne, and the Wharton School. We are very appreciative of financial support provided for this project by the HEC Foundation, the UBC Bureau of Asset Management, and the Social Sciences and Humanities Research Council of Canada. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

©2005 by Laurent E. Calvet and Adlai J. Fisher. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Multifrequency News and Stock Returns Laurent E. Calvet and Adlai J. Fisher NBER Working Paper No. 11441 June 2005 JEL No. G12, C22

ABSTRACT

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.

Laurent E. Calvet Department of Finance and Economics HEC School of Management 78351 Jouy-en-Josas Cedex France and NBER calvet@hec.fr Adlai J. Fisher Sauder School of Business University of British Columbia 2053 Main Mall Vancouver, BC V6T 1Z2 Canada adlai.fisher@sauder.ubc.ca

1. Introduction The recent asset pricing literature suggests that stock prices are driven by shocks with very heterogeneous degrees of persistence. For example, market returns are predictable at a range of business-cycle horizons; some variables provide best forecasts over intervals of twelve months or less while others increase in power out to five years and more. 1 Complementary studies emphasize even more persistent sources of variations in returns, including technological innovation (e.g., Greenwood and Jovanovic, 1999), exogenous demographic changes (e.g., Abel, 2003), and low frequency movements in consumption or dividend growth (Bansal and Yaron, 2004). 2 At the other end of the spectrum, high-frequency returns permit a large number of observations and thus potentially more precise econometric inference. Researchers have correspondingly related daily and intraday price movements to weather news (Roll, 1984), macroeconomic announcements (Andersen, Bollerslev, Diebold, and Vega, 2004), internet bulletin boards (Antweiler and Frank, 2004), analyst reports 3 and corporate announcements.4 The existing literature thus documents persistence levels in stock market news ranging from daily intervals to several decades.

Our research builds on this evidence by developing an equilibrium framework with news shocks at many different frequencies. Why has the existing literature not addressed this agenda? We offer two explanations.

First, it might seem plausible that some financial questions are best addressed in isolation at a single horizon. Following this logic, equity premium studies largely focus on annual data, while market efficiency research mainly uses higher frequencies. Recent evidence suggests, however, that fluctuations at different frequencies can interact.

Lochstoer (2004) thus shows that a slowly-evolving generational state variable controls business-cycle variation in risk premia. Similarly, Andersen, Bollerslev, Diebold, and Vega (2004) provide evidence that the high-frequency impact of macroeconomic news depends on the state of the business cycle.

A second, and more pragmatic, impediment to multifrequency research is that complexity grows quickly with the number of components. Recent contributions (e.g., Bansal and Yaron, 2004; Lochstoer, 2004) demonstrate not only the empirical advantage of using two persistence levels, but also that formal estimation becomes more difficult and high-dimensional calibration more necessary with a more complex setup.





1 See, for example, Lettau and Ludvigson (2001).

2 Endogenous mechanisms for extremely persistent fluctuations include habit formation (Campbell and Cochrane, 1999), durable consumption goods (Yogo, 2004a), and the dynamics of capital accumulation with adjustment costs (Jermann, 1998).

3 See, e.g., Womack (1996).

4 An extensive literature studies stock price reactions to corporate announcements including quarterly earnings, dividend policy, securities issuances and changes of control. See, e.g., MacKinlay (1997).

1 Our paper proposes a new direction to address these problems by developing a parsimonious equilibrium framework based on recent advances in multifrequency econometrics. An Epstein-Zin consumer receives an exogenous consumption stream, and prices a flow of correlated dividends with regime-switching in the mean and volatility of their growth rates.5 The model thus follows the recent trend to model dividends and consumption as correlated but not identical processes (e.g., Campbell and Cochrane, 1999).

Exact solutions for equilibrium prices, return dynamics, and filtered beliefs are available. Unlike previous Lucas tree economies considered in the literature (e.g., Bansal and Yaron, 2004; Lettau, Ludvigson, and Wachter, 2004), our setup implies that higher volatility reduces prices for any level of the elasticity of intertemporal substitution.

We specify news arrivals with a Markov-switching multifractal (MSM), a stochastic volatility model characterized by a small number of parameters but an arbitrarily large number of frequencies (Calvet and Fisher, 2001, 2002, 2004; Calvet, Fisher, and Thompson, 2004). Under this specification, news volatility is hit by exogenous shocks with highly heterogeneous durations, which range from one day to more than a decade in empirical applications. Earlier work shows that MSM captures the outliers, volatility persistence and power variation6 of financial series, while permitting maximum likelihood estimation and analytical multi-step forecasting. MSM compares favorably with standard volatility models such as GARCH(1, 1) both in- and out-of-sample (Calvet and Fisher, 2004). It is now natural to embed it into an equilibrium framework.

The multifrequency equilibrium model inherits the appealing properties of MSM.

It is tightly parameterized and permits structural estimation by maximum likelihood.

We estimate our specification on an index 7 of US equities over the period 1926-2004.

Versions of the model with six to eight volatility frequencies provide significant improvements in likelihood relative to lower dimensional specifications. The model also improves on earlier specifications of single frequency news arrivals (Campbell and Hentschel, 1992, hereafter “CH”), even though our approach uses fewer parameters.

Our model generates volatility feedback, the property that upward revisions to anticipated future volatility tend to decrease current returns. Consistent with a multifrequency perspective, previous researchers have studied this topic at a range of different 5 Following Hamilton (1989, 1990), researchers have used regime-switching to help explain financial phenomena including stock market volatility, return predictability, the relation between conditional risk and return, the term structure of interest rates, and the recent growth of the stock market. Contributions include Abel (1994, 1999), Bansal and Zhou (2002), Cecchetti, Lam and Mark (1990), David (1997), Kandel and Stambaugh (1990), Lettau, Ludvigson and Wachter (2004), Turner, Startz and Nelson (1989), Veronesi (1999, 2000, 2004), Wachter (2004), and Whitelaw (2000).

6 Power variation relates to the behavior at small time scales of sums of powers of absolute values of returns. See Calvet and Fisher (2002), Barndorff-Nielsen and Shephard (2003) and Andersen, Bollerslev, and Diebold (2003).

7 We splice the Schwert (1990a) and value-weighted CRSP indices, as in CH.

2 horizons. For example, French, Schwert, and Stambaugh (1987, hereafter “FSS”), CH, and Wu (2001) assess feedback effects in daily, weekly, and monthly data, while Pindyck (1984), Poterba and Summers (1985), Bansal and Yaron (2004), and Lettau, Ludvigson and Wachter (2004) emphasize volatility movements at the business cycle range and beyond.8 A multifrequency approach might therefore prove useful in this context.

Intuition suggests that high-frequency volatility shocks help to capture the dynamics of typical day-to-day variations, while lower-frequency movements generate the strong feedback required to fit the most extreme daily returns. Volatility feedback models are thus a natural setting where the interaction of various frequencies seems intuitively important. The paper can be viewed in this sense as a first step towards bringing together branches of the lower-frequency macro-finance and higher-frequency financial econometrics literature.

The multifrequency equilibrium generates substantially larger feedback effects than previous research. For instance, CH find that feedback amplifies the volatility of dividend news by only about 2%; they attribute this result to the property of GARCH-type specifications that the volatility of volatility can only be large if volatility itself is high.

In our stochastic volatility MSM specification for dividend news, feedback rises with the number of components and the likelihood function, increasing to between 12% and 24% for the preferred specifications with six to eight components. The multifrequency equilibrium model thus generates an unconditional feedback that is 6 to 12 times larger than in previous literature.9 A substantial level of endogenous skewness is difficult to obtain in our full-information equilibrium with symmetric dividends. Earlier volatility feedback studies attempt to address this by introducing predictive asymmetry (CH) or skewness (Wu, 2001) directly into the econometric specification of dividends. Our work instead investigates whether higher return moments can be modeled through the endogenous equilibrium implications of imperfect investor information and learning. We thus generalize our setup to allow that the investor observes noisy signals of the volatility components and then makes Bayesian inferences about the latent volatility state. The separation of dividends from consumption implies that the price:dividend ratio is linear in investor beliefs, making the model tractable.

Our learning model generates two main sets of results. First, signal precision has little effect on the unconditional mean and variance of stock returns. To explain this, 8 Investigation of volatility feedback in a general equilibrium setting was pioneered by Barsky (1989) in a two-period setting and Abel (1988) in the dynamic case. French, Schwert and Stambaugh (1987) and Campbell and Hentschel (1992) use GARCH-type processes to show that ex-post returns are negatively affected by positive innovations in volatility. Bekaert and Wu (2000) provide further support for this hypothesis.

9 Based on the paramater estimates presented in Wu (2001), unconditional volatility feedback is 3.5% for his model estimated on monthly data, and is negative for his model estimated on weekly data.

3 we show that the price:dividend ratio (P:D) in the learning model is the conditional expectation of its full-information counterpart. This implies the same mean and lower variance, which is the analogue in our setup of the variance bounds discussed by LeRoy and Porter (1981) and Shiller (1981). In our model, however, the reduction in variance is negligible because large movements of the P:D ratio are induced by shifts in the most persistent volatility components. Learning about these rare changes is therefore a transitory phenomenon that has limited impact on stock return variance, and we verify this logic numerically. The sizeable volatility feedback implied by our full-information specification is thus robust to changes in information quality.

Our second learning result is that changes in the most persistent components have strong effects on the higher moments of returns. In particular, varying the precision of the volatility signal generates a sizeable tradeoff between endogenous skewness and kurtosis. When investors have perfect information, volatility shocks are incorporated fully and immediately into price, regardless of the direction of change. By contrast, when the volatility component signals are poor, investors rely on dividend news to make inferences about the volatility state. They still learn quickly about volatility increases, because a single extreme fluctuation is highly improbable with low volatility. Learning about reduced volatility must be slow, however, because dividend news observations near the mean are a relatively likely outcome regardless of the true volatility state. Thus, bad news about volatility incorporates quickly into price, while good news trickles out slowly.10 This asymmetry creates the observed tradeoff between endogenous skewness and kurtosis as information quality changes.



Pages:   || 2 | 3 | 4 | 5 |   ...   | 6 |


Similar works:

«Code of Global Business Ethics and Compliance Standards July 1, 2014 Code of Global Business Ethics and Compliance Standards July 1, 2014 Page 2 Dear Fellow Employee: I am pleased to provide you with a copy of the Birla Carbon Code of Global Business Ethics and Compliance Standards. It contains the policies that guide our actions day to day. It represents a reaffirmation of our historic commitment to the highest level of ethical and legal conduct that has served us well through the years. This...»

«European Journal of Accounting Auditing and Finance Research Vol.2, No.9,pp.42-65, November 2014 Published by European Centre for Research Training and Development UK (www.eajournals.org) CONSUMER BEHAVIOUR TOWARDS ISLAMIC BANKING IN PAKISTAN Abdul Ghafoor Awan & Maliha Azhar Department of Business Administration, Institute of Southern Punjab-Pakistan ABSTRACT: Islamic banking is one of the most developing sectors in Pakistan. This study reveals the relationship between consumer behavior...»

«Immigrant-Native Differences in Stockholding – The Role of Cognitive and Non-Cognitive Skills Marc-André Luik, Max Friedrich Steinhardt HWWI Research Paper 164 Hamburg Institute of International Economics (HWWI) | 2015 ISSN 1861-504X Corresponding author: Max F. Steinhardt Hamburg Institute of International Economics (HWWI) Heimhuder Str. 71 | 20148 Hamburg | Germany Phone: +49 (0)40 34 05 76 662 | Fax: +49 (0)40 34 05 76 776 steinhardt@hwwi.org HWWI Research Paper Hamburg Institute of...»

«Clear Focus The Economic Impact of Vision Loss in Australia in 2009 An overview of the report prepared for Vision 2020 Australia by Access Economics Pty Limited June 2010 Overview prepared by Vision 2020 Australia, in collaboration with Access Economics and the project steering committee. Copies of the full report are available from www.vision2020australia.org.au or by calling +61 3 9656 2020. The financial support of members including the Brien Holden Vision Institute, Optometrists Association...»

«UNIVERSITY OF LONDON INSTITUTE OF HISTORlCAL RESEARCH CENTRE FOR METROPOLITAN HISTORY Annual Report 1989-90 Message from the Chairman of the Patrons 1. Director's Report 2. Project Reports i Feeding the City: London's impact on the economy of southern England c.1200-1350 ii Epidemics and Mortality in the Pre-industrial City: Florence and London compared iii From Counting-House to Office: the evolution of London's central financial district 1690-1870 iv Bibliography of Printed Works on London...»

«CURRICULUM VITAE Name: Yoram Krozer E-mail: Krozer@xs4all.nl Education: 1982 MsC, Biology, University of Utrecht. Main disciplines: environmental biology (University of Leiden), policy administration (University of Utrecht); science dynamics (University of Amsterdam) 1985 Economics, Department Policy and Management, University of Utrecht Main subjects: neo-Classic and neo-Keynesian economics, neo-Marxist streams, Development economics. 1986 Business Administration, Post-Technological College,...»

«This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: NBER Macroeconomics Annual 2012, Volume 27 Volume Author/Editor: Daron Acemoglu, Jonathan Parker, and Michael Woodford, editors Volume Publisher: University of Chicago Press ISSN: 0889-3365 Volume ISBN: cloth: 978-0-226-05277-9; paper: 978-0-226-05280-9, 0-226-05280-X Volume URL: http://www.nber.org/books/acem12-2 Conference Date: April 20-21, 2012 Publication Date: May 2013 Chapter...»

«Occasional Papers Series Discrimination and Stigmatisation of People with Epilepsy in Zambia: The Need for Integration of Social, Healthcare, and Policy Reform Amy Allen1 and Ethan Green2 19 August 2013 Occasional Paper #2013/01 aja76@cornell.edu 1 erg53@cornell.edu 2 Copyright 2013 Southern African Institute for Policy and Research Abstract Epilepsy is the most common neurological disease in sub-Saharan Africa with a high burden on lowand middle-income countries worldwide. The economic and...»

«Institutional Investment in the EU ETS Ivan Diaz-Rainey, Andrea Finegan, Gbenga Ibikunle, Daniel J. Tulloch December 2012 Tyndall Centre for Climate Change Research Working Paper 156 Institutional Investment in the EU ETS The Tyndall Centre Ivan Diaz-Rainey University of Otago ivan.diaz-rainey@otago.ac.nz Andrea Finegan University of East Anglia Gbenga Ibikunle University of Edinburgh Daniel J. Tulloch University of Otago Tyndall Working Paper 156, December 2012 Please note that Tyndall working...»

«MONEY, MACROECONOMICS AND KEYNES This volume, along with its companion volume Methodology, Microeconomics and Keynes, is published in honour of Victoria Chick, inspired by her own contributions to knowledge in all of these areas and their interconnections. It represents both consolidation and the breaking of new ground in Keynesian monetary theory and macroeconomics by leading figures in these fields. The chapters have been contributed by some of the many who admire Chick’s work: C. Rogers,...»

«Regulating International Finance: The Genesis and Transformation of Central Banking Practices by Joëlle Dumouchel A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Department of Political Science University of Toronto © Joëlle Dumouchel, 2016 Regulating International Finance: The Genesis and Transformation of Central Banking Practices Joelle Dumouchel Doctor of Philosophy Department of Political Science University of Toronto 2016 Abstract This...»

«Tax Fairness and the Tax Mix David G. Duff Associate Professor Faculty of Law University of Toronto Visiting Associate Professor Faculty of Law University of British Columbia November 2008 I. Introduction Justice, John Rawls famously wrote, is the first virtue of social institutions.1 Since a society’s tax system is one of its most basic and essential social institutions, the justice or fairness of this tax system is an important subject for social and political theory, as well as for...»





 
<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.