Transcript Real-time price discovery in global stock, bond and

Real-time price discovery in global
stock, bond and foreign
exchange markets
(by T. G. Andersen, T. Bollerslev,
F. X. Diebold, C. Vega)
Olesia Kiiashko
Kseniya Bortnikova
Khrystyna Pastukh
Ksenia Pogodina
OUTLINE
1. Introduction
2. High-frequency return data
3. Asset returns and macroeconomic surprises: basic results
4. A generalized specification
5. Summary and directions for future research
1. Introduction

How is news about macroeconomic fundamentals
incorporated in pricing stocks, bonds and foreign
exchange?

Macroeconomic fundamentals - are statistics that
indicate the current status of the economy of a state
(Interest Rates Announcement, GDP, CPI).
Traditional “efficient
markets” thinking (asset
prices should completely and
immediately reflect
movements in fundamentals)
Asset prices and
fundamentals may be largely
and routinely disconnected
Price discovery question:
1). Previous researches:

the connection only for a single asset class and
country (e.g., Balduzzi et al., 2001, study the U.S.
bond market),

multiple asset classes but only a single country
(e.g., Boyd et al., 2005, who study U.S. stock and
bond markets).

multiple countries but only a single asset class
(e.g., Andersen et al., 2003b, study several major
U.S. Dollar exchange rates).
2). In this paper authors examine multiple countries
and asset classes.
Scientists methodology:
Simultaneously combining:

1) high-quality and ultra-high frequency asset price data
across markets and countries  to study price
movements in (near) continuous time;

2) a very broad set of synchronized survey data on
market participants' expectations,  to infer “surprises”
or “innovations” when news is announced;

3) advances in statistical modeling of volatility, which
facilitate efficient inference.
2. High-frequency return data
Object of research - a unique high-frequency* futures dataset
 Investigation the response of U.S., German and British stock,
bond and foreign exchange markets to real-time U.S.
macroeconomic news

* High-frequency financial data are observations on financial variables
taken daily or at a finer time scale (computer technology and data recording
and storage have made these data sets accessible to researchers).
Reasons for using futures market data
1)
2)
3)
Futures prices are easily available on a tick-by-tick*
basis
Most
significant
U.S. macroeconomic
news
announcements are released at 8:30 Eastern Standard
Time (EST) when the futures markets are open, but
the equity markets closed
Transaction costs are lower in the futures markets, and
the contracts are very actively traded
Focus on price adjustments
measured over very short
time intervals
Futures markets tend to
lead cash markets in terms
of price discovery
*Tick - minimum change in price a security can have, either up or down.
High-frequency returns around
macroeconomic news announcements
All results reported below are based on five-minute local
currency continuously compounded returns
 News announcement regressions are based on the period
ranging from ten minutes before to one-and-a-half hours after
an announcement

Macroeconomic news does move the markets

The summary statistics confirm the usual rank ordering in terms
of volatility, with stock markets being the most volatile, followed
by foreign exchange rates, and then fixed income.
Unconditional sample correlations report

The table provides a sense of the comovements among the
asset markets during news announcement times

U.S. macroeconomic news affects the Dollar and the equity
market in the same direction
The positive bond and equity market crosscorrelations explanations (during U.S.
macroeconomic news announcement)

Stock market prices around the world would tend to be
positively correlated if the discount rate is the dominant
effect or if the domestic and foreign real output and/or
monetary shocks are positively correlated

Although the high positive contemporaneous correlation
across countries may be explained by the common bond
market response to U.S. macroeconomic news, a number
of other influences, including market microstructure,
contagion, and cross-market hedging effects, could also
account for the high-frequency correlations.
Correlations in expansions vs. contractions
Whether the interactions among asset returns and their
responses to macroeconomic fundamentals vary
systematically across the business cycle?
the unconditional correlations separately for
data for
the expansion
period
the stock-bond
correlations are
positive and small
1
period
cannot claim as a
general pattern
explanation
the contraction
period
the stock-bond
correlations are
negative and large
the cash flow effect dominates during contractions while
the discount effect dominates in expansions (due to central
bank policy)
3. Asset returns and macroeconomic
surprises: basic results

Сharacterization of the dynamic effects of U.S.
macroeconomic news announcements for each of our nine
asset markets
1)
2)
Describing the measurement of macroeconomic news
Estimating the responses of asset returns to news
Data used:
• MMS (Money Market Services) real-time data
• Period from January 1, 1992 through December 31, 2002
• The units of measurement obviously differ across the
macroeconomic indicators
Dynamic news effects

Response equations estimation using the two five-minute
returns directly preceding and the eighteen five-minute
returns following each announcement
Methods used:
1) OLS
consistent (but the disturbance terms for the
five-minute return regressions are heteroskedastic)
2) WLS
consistent+efficient
3 markets:
 Domestic and foreign bond markets,
 Foreign exchange markets
 Domestic and foreign equity markets.
Estimation results.
Bond Markets and Foreign exchange markets
Bond Markets
Immediate
reaction
• positive real shocks and inflationary shocks
produce lower bond prices ( higher yields )
Strongest
effect
• U.S.,
because
U.S.
macroeconomic
fundamentals also significantly impact the
foreign bond markets
Foreign Exchange Markets
Immediate
reaction
• positive domestic real shocks lead to an
appreciation of the Dollar (during the recent
contraction regime)
• U.S. inflation rate news do not systematically
affect the foreign exchange rates
Estimation results. Equity markets.
Full sample
Splitted
sample
(expansions vs
contractions)
almost no significant responses
• positive real economic shocks are met with a
negative response in expansions and a
positive response in contractions.
• negative impact of inflation during expansions,
because of the presence of stronger antiinflationary monetary policies
• the responses occur almost instantaneously and tend to
“drown” in the overall day-to-day price movements
• it is crucial to focus on the high-frequency returns just
around the announcement time.
A closer look at stock–bond correlations
state dependence in
the equity markets
news reaction
positively
correlated during
expansions
the time-invariant
reaction of the
bond markets
state dependent
stock–bond market
correlations
negatively
correlated during
contractions
the existence of time-varying crossmarket dependence
on the nonfarm payroll
announcement
monthly realized
daily realized
correlations
correlations
correlation patterns are driven by the macroeconomic news releases?
correlation patterns simply indicate the general relationship among the
markets?
Daily realized correlations on the nonfarm
payroll announcement

January 1, 1992 - December 31, 2002

The shaded area corresponds to the
U.S. contraction sample from March
1, 2001 to December 31, 2002
Monthly realized correlations on the
nonfarm payroll announcement

January 1, 1992 - December 31, 2002

The shaded area corresponds to the
U.S. contraction sample from March
1, 2001 to December 31, 2002
4. A generalized specification

Why to implement the generalized specification? so far immediate news reaction is observed
(synchronous high-frequency data around the
time of the announcement)  mitigates other
influences & potentially omitted variables biases 
simultaneous equations model

The model is identical to already presented model,
except that the contemporaneous asset returns are
included
4. A generalized specification

Problem: without any additional restrictions or
modeling assumptions, contemporaneous
coefficients, that capture cross-asset linkages
and/or spillover effects are not identified , not
explained by news announcements
Solution: applying QMLE techniques to the
multivariate GARCH model
 Estimate the model for 3 markets at a time

Estimation Results
1) Trivariate domestic system (U.S. T-Bond, S&P500, and $/
Euro returns)
9301 five-minute announcement at period 1(expansion)
All coefficients have natural interpretation, however, in
contrast to previous results(positive correlation) ,we have
two opposing effects: bond prices affect stock prices
positively, but stock prices affect bond prices negatively.
6463 five-minute announcement at period 2(contraction)
Qualitatively as before . But! For S&P500: has opposite sign
positive stock returns, ceteris paribus, always raise interest
rates, while positive innovations to interest rates have a
strongly regime- dependent impact on stock returns
Estimation Results
2) Interdependence among the national stock
markets
estimated coefficients are positive (expansion
sample) important cross-country linkages
over-and-above those explained by the U.S.
macroeconomic news releases.
estimating the same relations over the more
recent contraction period suggests even
stronger contemporaneous cross-country
linkages.
5. Summary and directions for
future research
What was done?
Authors characterized the real-time interactions among
U.S., German and British stock, bond and foreign exchange
markets in the periods surrounding U.S. macroeconomic
news announcements.
What was found?
Announcement surprises produce conditional mean jumps
high-frequency stock, bond and exchange rate dynamics
are linked to fundamentals.

Bad macroeconomic news has the traditionally-expected
negative equity market impact during contractions, but a
positive impact during expansions

Distinct correlation patterns are not limited to the period
around announcements; rather, they apply generally for
trading day returns in expansions and contractions
Generalized estimation approach documents highly
significant contemporaneous cross-market and crosscountry linkages, even after controlling for macroeconomic
announcement effects
Important direct spillover effects among foreign and U.S.
equity market, that let observe the interaction of activelytraded financial assets around announcement times
The discount rate effect dominates in each of the three
stock markets during U.S. economic expansions, coupled
with the U.S. interest rate playing the role of the “world
interest rate” and hence dictating the move of the foreign
bond markets.



Directions for future research

Using high-frequency data to quantify the three separate
channels of private information, contagion, and public
information that link the markets
Recent studies
Brandt and Kavajecz (2004)
Evans and Lyons (2003, 2005)
Pasquariello and Vega (2004)

Increased the role of order
flow in the price formation
process
Combining the information in order flow and other
liquidity measures in concert with the new statistical
procedures and rich high-frequency return and news
announcement data
Thank you for your attention!