We examine empirically the response of bond returns and their volatility to good and bad macroeconomic news during expansions and recessions. We find that macroeconomic announcements are most important when they contain bad news for bond returns in expansions and, to a lesser extent, good news in contractions. In expansions, the bond market responds most strongly to bad news in non-farm payrolls, while in recessions good news about inflation is relatively more important. We also document that macroeconomic news impacts the volatility of bond returns at all maturities by increasing jump intensities and altering the jump size distribution.

We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities following the news release. It is also associated with increased volume and decreased open interest in option markets after the release, consistent with market participants using financial options to hedge or speculate on macroeconomic news.

ABSTRACT Most regulators around the world reacted to the 2007–09 crisis by imposing bans on short selling. These were imposed and lifted at different dates in different countries, often targeted different sets of stocks, and featured varying degrees of stringency. We exploit this variation in short‐sales regimes to identify their effects on liquidity, price discovery, and stock prices. Using panel and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small capitalization and no listed options; (ii) slowed price discovery, especially in bear markets, and (iii) failed to support prices, except possibly for U.S. financial stocks.

We propose a simple cross-sectional technique to extract daily factors from economic news released at different times and frequencies. Our approach can effectively handle the large number of different announcements that are relevant for tracking current economic conditions. We apply the technique to extract real-time measures of inflation, output, employment, and macroeconomic sentiment, as well as corresponding measures of disagreement among economists about these indices. We find that our procedure provides more timely and accurate forecasts of future changes in economic conditions than other real-time forecasting approaches.

This paper shows that managers' personal beliefs and individual characteristics explain a large share of the substantial time-variation of derivative use beyond firm, industry, and market fundamentals. We construct a panel data set of foreign currency derivative holdings and currency exposures for U.S. non-financial firms. We use a novel approach to build a firm-specific foreign exchange return. We find that managers adjust derivatives notional amounts in response to past foreign exchange returns, as if they were forming views on future currency prices. We then construct an empirical measure of speculative behavior for each firm to investigate the profile of the speculator. Firms where the CEO holds an MBA degree, is younger, and has less previous working experience speculate more. These results are consistent with overconfident managers taking more risk.

[Investors rebalance their portfolios as their views about expected returns and risk change. We use empirical measures of portfolio rebalancing to back out investors' views, specifically, their views about the state of the economy. We show that aggregate portfolio rebalancing across equity sectors is consistent with sector rotation, an investment strategy that exploits perceived differences in the relative performance of sectors at different stages of the business cycle. The empirical footprint of sector rotation has predictive power for the evolution of the economy and future bond market returns, even after controlling for relative sector returns. Contrary to many theories of price formation, trading activity, therefore, contains information that is not entirely revealed by resulting relative price changes.]

[Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a nontrivial role, especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.]

In both the subprime crisis and the eurozone crisis, regulators imposed bans on short sales mainly aimed at preventing stock price turbulence from destabilizing financial institutions. Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones. Increases were larger for more vulnerable financial institutions. To take into account the endogeneity of short sales bans, we match banned financial institutions with unbanned ones with similar sizes and levels of riskiness and instrument the 2011 ban decisions with regulators’ propensity to impose a ban in the 2008 crisis. (JEL G01, G12, G14, G18) Received July 8, 2020; editorial decision September 8, 2020 by Editor Isil Erel.

This paper studies the importance of heterogeneous beliefs for the dynamics of asset prices. We focus on currency markets, where the absence of short-selling constraints allows us to perform sharper tests of theoretical predictions. Using a unique data set with detailed information on foreign-exchange forecasts, we construct an empirical proxy for differences in beliefs. We show that this proxy has a strong effect on the implied volatility of currency options beyond the volatility of macroeconomic fundamentals. We document that differences in beliefs impact also on the shape of the implied volatility smile, on the volatility risk-premiums, and on future currency returns.

Investors rebalance their portfolios as their views about expected returns and risk change. We use empirical measures of portfolio rebalancing to back out investors' views, specifically, their views about the state of the economy. We show that aggregate portfolio rebalancing across equity sectors is consistent with sector rotation, an investment strategy that exploits perceived differences in the relative performance of sectors at different stages of the business cycle. The empirical footprint of sector rotation has predictive power for the evolution of the economy and future bond market returns, even after controlling for relative sector returns. Contrary to many theories of price formation, trading activity, therefore, contains information that is not entirely revealed by resulting relative price changes. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.