DP15581 Expectation dispersion, uncertainty, and the reaction to news

Author(s): Benjamin Born, Jonas Dovern, Zeno Enders
Publication Date: December 2020
Date Revised: May 2021
Keyword(s): event study, Expectation dispersion, forecaster disagreement, Macroeconomic news, Stock market, uncertainty
JEL(s): E44, G12, G14
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15581

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. Higher 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.