Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign Journal of International Economics 73 (2007) 251–277 www.elsevier.com/locate/econbase ☆ This work was supported by the National Science Foundation, the Guggenheim Foundation, the BSI Gamma Foundation, and CREATES. For useful comments we thank the Editor and referees, seminar participants at the Bank for International Settlements, the BSI Gamma Foundation, the Symposium of the European Central Bank/Center for Financial Studies Research Network, the NBER International Finance and Macroeconomics program, and the American Economic Association Annual Meetings, as well as Rui Albuquerque, Annika Alexius, Boragan Aruoba, Anirvan Banerji, Ben Bernanke, Robert Connolly, Jeffrey Frankel, Lingfeng Li, Richard Lyons, Marco Pagano, Paolo Pasquariello, and Neng Wang. ⁎ Corresponding author. Department of Economics, University of Pennsylvania, 3718 Locust Walk Philadelphia, PA 19104-6297, United States. Tel.: +1 215 898 1507; fax: +1 215 573 4217. E-mail addresses: [email protected] (T.G. Andersen), [email protected] (T. Bollerslev), [email protected] (F.X. Diebold), [email protected] (C. Vega). 0022-1996/$ see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.jinteco.2007.02.004 Author's personal copy exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news. © 2007 Elsevier B.V. All rights reserved.