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1. Soft Information in Earnings Announcements: News or Noise?

Author:
Elizabeth Demers and Clara Vega
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines whether the “soft” information contained in the text of management’s quarterly earnings press releases is incrementally informative over the company’s reported “hard” earnings news. We use Diction, a textual-analysis program, to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and document that unanticipated net optimism in managers’ language affects announcement period abnormal returns and predicts post- earnings announcement drift. We find that it takes longer for the market to understand the implications of soft information than those of hard information. We also find that the market response varies by firm size, turnover, media and analyst coverage, and the extent to which the standard accounting model captures the underlying economics of the firm. We also show that the second moment of soft information, the level of certainty in the text, is an important determinant of contemporaneous idiosyncratic volatility, and it predicts future idiosyncratic volatility.
Topic:
Economics and Finance
Political Geography:
Global Focus

2. Do Fundamentals Explain the International Impact of U.S. Interest Rates? Evidence at the Firm Level

Author:
John Ammer, Clara Vega, and Jon Wongswan
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm’s CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms’ responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.
Topic:
Monetary Policy, Investment, Interest Rates, and Credit
Political Geography:
United States and North America

3. Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices

Author:
Lutz Kilian and Clara Vega
Publication Date:
11-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Models that treat innovations to the price of energy as predetermined with respect to U.S. macroeconomic aggregates are widely used in the literature. For example, it is common to order energy prices first in recursively identified VAR models of the transmission of energy price shocks. Since exactly identifying assumptions are inherently untestable, this approach in practice has required an act of faith in the empirical plausibility of the delay restriction used for identification. An alternative view that would invalidate such models is that energy prices respond instantaneously to macroeconomic news, implying that energy prices should be ordered last in recursively identified VAR models. In this paper, we propose a formal test of the identifying assumption that energy prices are predetermined with respect to U.S. macroeconomic aggregates. Our test is based on regressing cumulative changes in daily energy prices on daily news from U.S. macroeconomic data releases. Using a wide range of macroeconomic news, we find no compelling evidence of feedback at daily or monthly horizons, contradicting the view that energy prices respond instantaneously to macroeconomic news and supporting the use of delay restrictions for identification.
Topic:
Economics, Energy Policy, Oil, and Macroeconomics
Political Geography:
United States and North America

4. Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets

Author:
Torben G. Andersen, Tim Bollerslev, Francis X. Diebold, and Clara Vega
Publication Date:
09-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets
Political Geography:
United States