TY - JOUR AU - Andersen,Torben G. AU - Bollerslev,Tim AU - Diebold,Francis X. AU - Vega,Clara TI - Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets JF - National Bureau of Economic Research Working Paper Series VL - No. 11312 PY - 2005 Y2 - May 2005 UR - http://www.nber.org/papers/w11312 L1 - http://www.nber.org/papers/w11312.pdf N1 - Author contact info: Torben G. Andersen Kellogg School of Management Northwestern University 2001 Sheridan Road Evanston, IL 60208 Tel: 847/467-1285 Fax: 847/491-5719 E-Mail: t-andersen@kellogg.northwestern.edu Tim Bollerslev Department of Economics Duke University Box 90097 Durham, NC 27708-0097 Tel: 919/660-1846 Fax: 919/684-8974 E-Mail: boller@econ.duke.edu Francis X. Diebold Department of Economics University of Pennsylvania 3718 Locust Walk Philadelphia, PA 19104-6297 Tel: 215/898-1507 Fax: 212/573-4217 E-Mail: fdiebold@sas.upenn.edu Clara Vega Federal Reserve Board Division of International Finance Washington, DC 20551 Tel: 202-452-2379 Fax: 202-263-4850 E-Mail: clara.vega@frb.gov AB - We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the U.S. economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing "cash flow" and "discount rate" effects for equity valuation. This finding also helps explain the apparent time-varying correlation between stock and bond returns, and the relatively small equity market news announcement effect when averaged across expansions and recessions. Hence, while our results confirm previous unconditional rankings suggesting that bond markets almost uniformly react most strongly to macroeconomic news, followed by foreign exchange and then equity markets, importantly when conditioning on the state of the economy the foreign exchange and equity markets appear equally responsive. Lastly, relying on the pronounced heteroskedasticity in the new high-frequency data, we also document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects. ER -