Discussion Paper Details

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Title: Expectation dispersion, uncertainty, and the reaction to news

Author(s): Benjamin Born, Jonas Dovern and Zeno Enders

Publication Date: December 2020

Keyword(s): event study, Expectation dispersion, forecaster disagreement, Macroeconomic news, Stock market and uncertainty

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: Releases of key macroeconomic indicators are closely watched by financial markets. We investigate the role of expectation dispersion and economic uncertainty for the stock-market reaction to indicator releases. We find that the strength of the financial market response to news decreases with the preceding dispersion in expectations about the indicator value. Uncertainty, in contrast, increases the response. We rationalize our findings in a model of imperfect information. In the model, dispersion results from a perceived weak link between macroeconomic indicators and fundamentals that reduces the informational content of indicators, while higher fundamental uncertainty makes this informational content more valuable.

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Bibliographic Reference

Born, B, Dovern, J and Enders, Z. 2020. 'Expectation dispersion, uncertainty, and the reaction to news'. London, Centre for Economic Policy Research.