Business Cycles and Stock Market's Response to Macroeconomic News Announcements: Evidence from the U.S. Stock Market 2002–2010

Abstract

This thesis analyzes how macroeconomic news announcements affect stock market during different stages of business cycle. Several studies have examined the effects of macroeconomic news announcements on stock market assuming that the response to news is exactly the same in spite of the state of the economy. In other words, the reaction is assumed to be similar in recession as well as in expansion. However, recent studies give a reason to believe that stock market reacts differently depending on the stage of the business cycle. To investigate the effects of macroeconomic news announcements and the state dependence in the U.S. stock market, the thesis focuses on daily returns of the S&P 500 Index, U.S. macroeconomic data and two business cycle measures. The sample period expands from January 2002 to August 2010.

The thesis focuses on ten different U.S. macroeconomic news releases selected on the basis of market significance conducted by Bloomberg database and the major economic indicators classified by the Bureau of Labor Statistics (BLS). These ten macroeconomic news announcements used in the study are Conference Board Consumer Confidence Index, Consumer Price Index, Gross Domestic Product, Institute for Supply Management (Manufacturing), Initial Jobless Claims, Michigan Consumer Sentiment Survey, Nonfarm Payrolls, Purchasing Managers Index, Producer Price Index, and Retail Sales.

To analyze the effects of macroeconomic news announcements including the business cycle variation in the U.S. market, a time series regression analysis is formulated by using positive and negative surprises in macroeconomic news releases. Moreover, two business cycle dummies are constructed in order to measure the business cycle variation; Fed Funds Rate and NBER business cycle turning points. The empirical findings suggest that the U.S. stock market responses to macroeconomic news announcements and that the response varies depending on the stage of economic cycle.