DP5598 Asymmetric Information in the Stock Market: Economic News and Co-movement

Author(s): Rui Albuquerque , Clara Vega

Publication Date: March 2006

Keyword(s): private information , public news announcements , information spillovers , international equity returns , contagion

JEL(s): F3 , G12 , G14 , G15

Programme Areas: Financial Economics , International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5598.asp

We analyze the effect that real-time domestic and foreign news about fundamentals have on the correlation of stock returns of a small open economy, Portugal, and a large open economy, the U.S. We also study the role of public and private information in the price formation process in the U.S. and Portuguese stock markets. First, and consistent with our theoretical model, we find that U.S. macroeconomic news and Portuguese earnings news do not affect the cross-country stock market correlation, whereas Portuguese macroeconomic news lowers the cross-country stock market correlation. Second, we find that U.S. public information affects Portuguese stock market returns, but this effect is diminished when U.S. stock market returns are included in the regression; we provide evidence in the paper that this effect does not derive from contagion as commonly accepted. Finally, public information news in the U.S. is associated with increased liquidity, while the effect in Portugal depends on the type of news releases.