“The analysis of the extent to which prices in financial markets incorporate fundamental information is central to the theoretical and empirical finance literature. […] Prior research has examined the links between financial and real variables by studying the effects of the disclosure of macroeconomic information (often without first identifying its surprise content) on stock and bond markets (often separately) (Brenner et al., 2009, p. 1286). The purpose of this literature review is to present the findings from some of these existing literature works.
Researchers Jiang et al. (2012) conducted three steps to analyse the underlying issue. Firstly, they in analysing the existence of volatility spillovers, the researchers provide evidence and insights. Secondly, they are concerned with the magnitude. Researchers focus is on how and why the macroeconomic news announcements affect the magnitude of implied volatility spillovers. Thirdly, both scheduled and unscheduled news have been examined. There were differences in how the scheduled and the unscheduled have an impact on the implied spillover. Differences observed are twofold. First, there were differences in the way spillover of implied volatility, which was observed in synchronous international markets during the 2007-2010 time periods. This was the intense financial period where the financial crises had already creased some uncertainties. There were significant differences in the US and European market, and within European markets itself. The second major set of differences was observed in the case of the scheduled and the unscheduled news releases. It was observed that scheduled news released had a more calming effect on the market as information was reduced in the market that led to resolutions in information uncertainty. Where uncertainty was reduced, then there was a decrease in volatility (Scharnagl and Stapf, 2015). In the case of unscheduled news releases on the other hand, information uncertainty was created. Hence, this resulted in increase in implied volatility. While the researchers Jinag et al. (2012) were able to identify that there was increase and decrease in volatility when there are announcements, they were not able to assess the magnitude of volatility spillovers. The magnitude changes do not come under their prediction, and this is one research limitation that could be addressed in this paper. Furthermore, the model work of Jiang et al. (2012) and Krieger et al. (2015) also used in this current work because how their model was able to predict spillover effects based on news broadcasts in the case of both extreme market events and other international markets.
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