Macroeconomic news effects on conditional volatilities in the bond and stock markets

This paper investigates the sources of time-varying risk for the US stock and bond markets. The model captures the change in the risk premium due to each market's own volatility risk and the covariance risk. We test for the effects of macroeconomic news on time-varying volatility as well as tim...

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Bibliographic Details
Published in:Applied financial economics 2006-03, Vol.16 (5), p.377-384
Main Authors: Arshanapalli, Bala, d'Ouville, Edmond, Fabozzi, Frank, Switzer, Lorne
Format: Article
Language:English
Subjects:
Bond market
Bond markets
Economic information
Economic models
Empirical tests
Financial research
Macroeconomics
Market analysis
News
Risk
Risk premiums
Securities markets
Stock exchange
Stock prices
U.S.A
Volatility
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Summary:This paper investigates the sources of time-varying risk for the US stock and bond markets. The model captures the change in the risk premium due to each market's own volatility risk and the covariance risk. We test for the effects of macroeconomic news on time-varying volatility as well as time-varying covariance, and whether such news induces time-varying risk premia in either of the markets. We find that stocks and bonds have higher volatility on the day of macroeconomic announcements. This higher volatility is transitory but because it can be anticipated, it induces increases in the risk premium in both markets.
ISSN:0960-3107
1466-4305
DOI:10.1080/09603100500511068