Department of Economics and Business Economics

And Now, The Rest of the News: Volatility and Firm Specific News Arrival

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  • Robert F. Engle
    Robert F. EngleStern School of Business, New YorkUnited States
  • Martin Klint Hansen
    Martin Klint HansenDenmark
  • Asger Lunde
Starting with the advent of the event study methodology, the puzzle of how public information relates to changes in asset prices has unraveled gradually. Using a sample of 28 large US companies, we investigate how more than 3 million firm specific news items are related to firm specific stock return volatility. We specify a return generating process in conformance with the mixture of distributions hypothesis, where stock return volatility has a public and a private information processing component. Following public information arrival, prices incorporate public information contemporaneously while private processing of public information generates private information that is incorporated sequentially. We refer to this model as the information processing
hypothesis of return volatility and test it using time series regression. Our results are evidence that public information arrival is related to increases in volatility and volatility clustering. Even so, clustering in public information does not fully explain volatility clustering. Instead, the presence of significant lagged public information effects suggest private information, generated following the arrival of public information, plays an important role. Including indicators of public information arrival explains an incremental 5 to 20 percent of variation in the changes of firm specific return volatility. Contrary to prior financial information research, our investigation favors the view that return volatility is related to public information arrival.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages48
StatePublished - 4 Dec 2012
SeriesCREATES Research Papers
Number2012-56

    Research areas

  • Firm Specific News, Realized Volatility, Public Information Arrival

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