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Macroeconomic news announcement effects in financial markets. / Kevin Philip Evans
Swansea University Author: Kevin Philip Evans
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The interdependence between financial markets and economic fundamentals has formed an important part of financial economics research for many years including the asset pricing, market microstructure and financial econometrics literatures. This thesis contributes to these areas by investigating the i...
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The interdependence between financial markets and economic fundamentals has formed an important part of financial economics research for many years including the asset pricing, market microstructure and financial econometrics literatures. This thesis contributes to these areas by investigating the impact of macroeconomic news announcements on financial markets through three substantial empirical chapters. In the first, real-time monthly UK macroeconomic variables comprise potential risk factors within a test of the Arbitrage Pricing Theory, the results of which confirm that unexpected inflation and investment uncertainty are significantly priced. The key innovation in this research is the identification of asymmetric risk pricing in the sense that these factors are only priced during periods of the business cycle when their associated risks are most prevalent. The second empirical study utilises high frequency data to assess the very short-run reaction of Euro exchange rates to macroeconomic news announcements. Using this new data set and a wider set of international economic indicators than considered hitherto, this chapter contributes to the literature by modelling simultaneously the intraday patterns, macroeconomic announcement effects and fractional integration in volatility, thereby permitting robust estimation of the effects of news announcements and their associated information surprise on returns and volatility. US news indicators are found to dominate Euro exchange rate volatilities, causing both extreme short lived returns and violent, more persistent increases in volatility. In further exploration of such effects, but in the context of futures markets, the third empirical chapter reported considers a continuous time jump diffusion model and implements very recently developed non-parametric techniques to identify daily jump variation and intraday jumps. Jumps are found to be important components of the price process, through their size, intensity and contribution to quadratic variation. Many jumps are caused by US macroeconomic news and the information surprises delivered by data releases explain vast proportions of these jumps, confirming that news has an immediate impact and that asset prices are indeed closely linked to economic fundamentals.
School of Management