A key question in the macro-finance literature concerns the drivers of asset prices. Are asset prices mainly driven by news, or by changes in sentiment and other factors unrelated to economic fundamentals? In most asset pricing models, news play a dominant role. But in empirical investigations, the explanatory power of news is often quite low.
We study the explanatory power of news by building a large, time-stamped event database covering a wealth of news related to the macroeconomy, including macroeconomic data releases, central bank announcements, bond auctions, election results, sovereign rating downgrades, and natural catastrophes. We combine this event database with high-frequency stock price and bond yield changes, both for the U.S. and the euro area, going back to 2002.
We find that roughly half of all stock and bond price movements in the U.S. and euro area occur in tight windows around clearly identifiable news and in this sense can be explained by those news. On the positive side, this share is much higher than most previous studies found. However, our results still ascribe a large role to return variation that cannot be linked to news about economic fundamentals.
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