Working Paper: CEPR ID: DP15581
Authors: Benjamin Born; Jonas Dovern; Zeno Enders
Abstract: Releases of key macroeconomic indicators are closely watched by financial markets. We investigate the role of expectation dispersion and economic uncertainty for the stock-market reaction to indicator releases. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Higher uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while higher fundamental uncertainty makes this informational content more valuable.
Keywords: expectation dispersion; uncertainty; macroeconomic news; stock market; event study; forecaster dispersion
JEL Codes: E44; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectation Dispersion (D84) | Weaker Market Response (G19) |
| Economic Uncertainty (D89) | Stronger Market Response (D49) |
| Expectation Dispersion and Economic Uncertainty (D84) | Market Reactions (G10) |