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The Reaction of Stock Returns to News about Fundamentals

Author

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  • Tolga Cenesizoglu
Abstract
This paper analyzes the reaction of stock returns to news about the state of the economy. We develop a general equilibrium asset pricing model where the investor learns about the growth rate of the economy through two sources of information, dividend realizations and regularly scheduled announcements about the state of the economy. We distinguish between dividend news and the unexpected part of the external signal and characterize the reaction of stock returns to news from these two sources of information. We show that the reaction to these news variables can be quite different under different assumptions about their precisions in different states. Our model is able to account for several empirical facts about the reaction of stock returns to news, such as time-varying and state-dependent reaction, asymmetric reaction to extreme news and stronger reaction to more precise signals.

Suggested Citation

  • Tolga Cenesizoglu, 2010. "The Reaction of Stock Returns to News about Fundamentals," Cahiers de recherche 1032, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1032
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-32.pdf
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    References listed on IDEAS

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    Cited by:

    1. Gilbert, Thomas, 2011. "Information aggregation around macroeconomic announcements: Revisions matter," Journal of Financial Economics, Elsevier, vol. 101(1), pages 114-131, July.

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    More about this item

    Keywords

    Regime Switching; Asymmetric Reaction; Dividend News; Public Announcements;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

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