Summary of WP/92/61
“Stock Market Response to Unexpected Macroeconomic News: The Australian Evidence” by Mehdi Sadeghi
The common cause of variations in Australian share prices has been empirically tested for the market as a whole and separately for industrial and resource sectors. According to the rational expectations theory and efficient market hypothesis, currently available information is totally embodied in share prices. Expected news has no effect, and share prices move only in response to “real” news, which has not been anticipated by the market.
The revisions in expected changes and unexpected changes in macro-economic variables have been identified as two main sources of surprise news. In this paper, data on expected changes in macroeconomic variables are both collected from survey forecasts and estimated through ARIMA procedures. Unexpected changes in macroeconomic variables from survey forecast data are the difference between actual and expected figures. Unexpected changes in macroeconomic variables from ARIMA procedures data are the residual errors of the regression. The results suggest that revisions in expected changes and unexpected changes in the current account deficit, the exchange rate, and the GDP growth rate, as well as unexpected changes in the unemployment rate, are positively correlated with share prices. Revisions in expected changes and unexpected changes in inflation and interest rates, and revisions in the expected unemployment rate, are negatively correlated with share prices. The empirical results also suggest that the market portfolio captures the impact of common economic shocks better than industrial and resource sectors, which have been influenced by industry-specific events.