When does the stock market listen to economic news? New evidence from copulas and news wires

TL;DR

This paper investigates how macroeconomic news influences stock market returns, revealing a nonlinear and asymmetric reaction where markets react strongly to bad news but largely ignore good news, regardless of economic conditions.

Contribution

It introduces a new comprehensive news measure using news wire indexing and applies copula theory to analyze the nonlinear, asymmetric relationship between news and stock returns.

Findings

Market reacts negatively to bad macroeconomic news

Market largely discounts good macroeconomic news

Reaction persists across different business cycle stages

Abstract

We study association between macroeconomic news and stock market returns using the statistical theory of copulas, and a new comprehensive measure of news based on the indexing of news wires. We find the impact of economic news on equity returns to be nonlinear and asymmetric. In particular, controlling for economic conditions and surprises associated with releases of economic data, we find that the market reacts strongly and negatively to the most unfavourable macroeconomic news, but appears to largely discount the good news. This relationship persists throughout the different stages of the business cycle.