Do financial markets respond to macroeconomic surprises? Evidence from the UK

Heinlein, Reinhold; Lepori, Gabriele M

Abstract

We investigate the response of UK asset prices to a large set of domestic scheduled macroeconomic announcements using data at a daily frequency from 1998 to 2017. Our results are mostly consistent with economic theory and follow two general patterns: (1) a stronger-than-expected economy raises stock returns, causes the home currency to appreciate, makes the yield curve steeper, and lowers the corporate credit quality spread; (2) higher-than-anticipated inflation leads to an appreciation of the domestic currency and raises the slope of the yield curve. Surprises about retail sales, claimant count rate, GDP, and industrial production have the most prevalent effects across the four asset classes in our data set. A large number of macroeconomic announcements increase trading activity in the stock market, whereas there is barely any (only minor) evidence that announcements (surprises) affect the volatility of asset prices. We also document that the effects of macroeconomic surprises are contingent not only upon the state of the economy but also on the state of the stock market (bull vs. bear).

Citation

Heinlein, R., & Lepori, G. M. (2022). Do financial markets respond to macroeconomic surprises? Evidence from the UK. Empirical Economics, 62, 2329–2371. https://doi.org/10.1007/s00181-021-02108-1

• Journal Article Type: Article
• Acceptance Date: Jul 29, 2021
• Online Publication Date: Aug 14, 2021
• Publication Date: 2022-05
• Deposit Date: Jul 30, 2021
• Publicly Available Date: May 5, 2022
• Journal: Empirical Economics
• Print ISSN: 0377-7332
• Electronic ISSN: 1435-8921
• Publisher: Springer (part of Springer Nature)
• Peer Reviewed: Peer Reviewed
• Volume: 62
• Pages: 2329–2371
• DOI: https://doi.org/10.1007/s00181-021-02108-1
• Keywords: Macroeconomic announcements; Stock returns; Effective exchange rate; Yield curve; Corporate credit quality spread; Trading volume
• Public URL: https://uwe-repository.worktribe.com/output/7589389