Stock Market News and Economic Fluctuations

Abstract

We decompose stock market returns into cash flow news and discount rate news and show that an increase in discount rate news, which reflects an increase in the quantity of risk or level of risk aversion in the economy, predicts a decrease in future aggregate output. Discount rate news dominates cash flow news and holds incremental predictive power relative to well-established predictors of output. The predictive power is especially strong in the lower tail of output fluctuations. International evidence confirms U.S. results and also shows that global discount rate news predicts cross-country output stronger than country-specific discount rate news.

Keywords: discount rate news, cash flow news, macroeconomic fluctuations

JEL Classification: g12