Effects of Macroeconomic News Announcements on Finnish Sector Index Returns

Abstract

Stock markets are widely recognized as a leading indicator for economic growth and business cycles and therefore they reflect almost instantly the current state of the economy. Obviously the news considering macroeconomic factors of a big economy do affect the foreign economies worldwide. The studies considering the news effects on the foreign stock markets are recently concentrated investigating the volatility implied uncertainty generated by new news on different types of markets. Meanwhile, the stock price changes themself have reached less attention in the recent years than the stock market volatility. Previous studies have found undeniable evidence of macroeconomic news affecting the stock, bond and other commodities markets.

The purpose of this study is to investigate how the U.S. and Finnish macroeconomic news affect the stock index prices in Finland in different economic situations. The indexes investigated are the 5 biggest sector indexes in Helsinki Stock Exchange. The time period in this thesis is from July 2005 to December 2009. Two Finnish and six U.S. macroeconomic variables are included in the study as well the S&P 500 stock index.

The theories of stock price formation are based on dividend discount model and Ohlsen model. To study the news effects in Finnish stock market an EGRACH regression model is constructed. The model examines the effect of news impact by regressing logarithmic change of daily stock price. The model takes also into account the current state of the economy by incorporating them into the study with dummy variables which represent the respective state of the economy. The results indicate that the stock index returns are affected by the macroeconomic news and they do react with different magnitude in economic booms and recessions.