Stock market returns are significantly correlated with inflation and money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish, perhaps because their effects are neither linear nor time invariant. We estimate a GARCH model of daily equity returns, where realized returns and their conditional volatility depend on 17 macro series' announcements. We find six candidates for priced factors: three nominal (CPI, PPI, and a Monetary Aggregate) and three real (Balance of Trade, Employment Report, and Housing Starts). Popular measures of overall economic activity, such as Industrial Production or GNP are not represented.

Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders' ability to accurately assess the condition of a firm (monitoring) and their ability to cause subsequent managerial actions to reflect those assessments (influence). Substantial evidence supports the existence of market monitoring. However, the existing evidence about market influence involves relatively rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies' security price changes reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, our methodology does not provide strong evidence that stock or (especially) bond investors regularly influence managerial actions. Day-to-day market influence remains, for the moment, more a matter of faith than of empirical evidence.

Stock market returns are significantly correlated with inflation and money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish, perhaps because their effects are neither linear nor time invariant. We estimate a GARCH model of daily equity returns, where realized returns and their conditional volatility depend on 17 macro series' announcements. We find six candidates for priced factors: three nominal (CPI, PPI, and a Monetary Aggregate) and three real (Balance of Trade, Employment Report, and Housing Starts). Popular measures of overall economic activity, such as Industrial Production or GNP are not represented.