Impact of European and American Business Cycle News on Euronext Trading

ABSTRACT This paper investigates the impact of surprises from European and US news announcements on the returns of the Pan-European Euronext market. We use four Business Cycle indicators, GDP, industrial production, retails sales, and unemployment to examine how a surprise affects the returns of the 250 largest stocks on Euronext. We find that the European surprises have no impact on the market but that surprises on all of the US business cycle indicators affect Euronext returns, with a stronger effect for GDP. These results hold independent of market conditions. JEL classification: G14 Keywords: Macroeconomic news announcements; Trading; Euronext (ProQuest: . denotes formulae omitted.) I. INTRODUCTION In this paper, we examine the impact of macroeconomic news announcements on Euronext. We investigate newly-available intra-day data to determine what kind of economic news announcements affects trading. This question is an appealing one that has led to many empirical studies on equity, bond and foreign exchange markets. Chen et al. (1986) find that industrial production, changes in the risk premium and the yields curve are significant factors in explaining expected stock returns. Cutler et al. (1989) confirm the difficulty involved in explaining more than half of stock returns variation by public news. They find a significant correlation between industrial production growth and real stock returns over the period 1926-1986. However, their results provide no evidence for the impact of inflation, money supply, and long-term interest rates on returns. Ehrmann and Fratzscher (2004) analyze the effects of US monetary policy on stock markets and show that a tightening of 50 basis points in interest rates reduces the S&P 500 index by about 3%. Boyd et al. (2005) find a positive influence of an announcement of rising unemployment on stocks during economic expansion and a negative influence during economic contraction. On stock markets, the literature has met many difficulties to detect relevant relationships between price variation and public information. In contrast, empirical examinations of bonds and foreign markets have shown that the price movements are strongly related to the arrival of information releases. Balduzzi et al. (2001) study the response of Treasury bills, notes and bonds in the interdealer broker market to 26 economic news announcements. Most of the announcements have a significant impact on the price that occurs within one minute after the release. Andersen et al. (2003) examine real-time exchange rates quotations of US dollar spot versus Mark, Pound, Yen, Swiss Franc and the Euro. They find that price jumps are linked to economic news with a greater impact from bad news than good news. Most of the existing research on equity markets has conducted event studies to analyze how markets react to macroeconomic news announcements. The difficulty of such methodologies to detect significant impact of economic news on stock markets seems to be related to the choice of frequency observations. Returns are computed on a monthly or daily returns basis and do not allow for the capture of the immediate response of the arrival of news announcements. The empirical methodology used in this paper is an intra-day event study that relates in an econometric model stocks returns and trading activity to the size of economic announcement surprises. It differs from previous literature on equity markets by using high-frequency data in order to characterize intra-day reactions to economic news. Moreover, we examine not only the price response to public information release but also the reaction of trading volume. Finally, we investigate only macroeconomic news items because their timing is perfectly known with no risk of private information conveyed before the official date. The effects of European and American macroeconomic announcements are both analyzed. We use European macroeconomic announcements as a benchmark in order to compare the magnitude of the trading response to US news relative to European news. …