Alexander Kurov

Macroeconomic cycles and the stock market's reaction to monetary policy

This paper examines cyclical variation in the effect of Fed policy on the stock market. We find a much stronger response of stock returns to unexpected changes in the federal funds target rate in recession and in tight credit market conditions. Using firm-level data, we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms. Overall, the results are consistent with the credit channel of monetary policy transmission.

Investor Sentiment, Trading Behavior and Informational Efficiency in Index Futures Markets

This paper shows that traders in index futures markets are positive feedback traders-they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment-driven trading increases market liquidity. Copyright 2008, The Eastern Finance Association.

The Impact of Monetary Policy Surprises on Energy Prices

This paper examines the effect of monetary policy surprises on energy prices at intraday, daily, and monthly frequencies. We measure monetary policy shocks using changes in interest rate futures prices that capture unexpected changes in the fed funds target rate. We find a significant response of energy prices to surprise changes in the fed funds target rate in an intraday window immediately following the monetary announcement. However, the accumulated responses of energy prices to monetary shocks over a period of several days after the announcement are statistically insignificant. We also use fed funds futures data to identify the contemporaneous impact of monetary policy shocks on oil prices in a monthly structural vector autoregressive (VAR) setup. We find no statistically significant effect of federal funds rate shocks on oil prices. The VAR estimates support the assumption of no contemporaneous feedback from monetary policy to energy prices.

What Do Chinese Macro Announcements Tell Us About the World Economy

We examine the effect of scheduled macroeconomic announcements made by China on world financial and commodity futures markets. All announcements related to Chinese manufacturing and industrial output move stock markets, energy and industrial commodities as well as commodity currencies. News about Chinese domestic consumption leaves most markets unaffected, suggesting that market participants view the announcements primarily as a signal of the state of the global economy rather than merely of China’s domestic economy. The market response to unexpectedly strong output announcements is not consistent with investors being concerned about tightening of Chinese macroeconomic policy; instead, the world markets view strong Chinese output as a rising tide that lifts all boats. JEL classification: E44; G14; G15We examine the effect of scheduled macroeconomic announcements made by China on world financial and commodity futures markets. All announcements related to Chinese manufacturing and industrial output move stock markets, energy and industrial commodities as well as commodity currencies. News about Chinese domestic consumption leaves most markets unaffected, suggesting that market participants view the announcements primarily as a signal of the state of the global economy rather than merely of Chinas domestic demand. The market response to unexpectedly strong output announcements is not consistent with investors being concerned about tightening of Chinese macroeconomic policy; instead, the world markets view strong Chinese output as a rising tide that lifts all boats.

Do Investors Care about Presidential Company-Specific Tweets?

When the President of the United States tweets, do investors respond? We analyze the impact of tweets from President Trumps official Twitter accounts from November 9, 2016 to December 31, 2017 that include names of publicly traded companies. We find that these tweets move company stock prices and increase trading volume, volatility, and institutional investor attention, with a stronger impact before the presidential inauguration. There is some evidence that the initial impact of the presidential tweets on stock prices is reversed on the next few trading days.

The Informational Role of Index Option Trading

Do order flows in index derivatives capture informed trading? We show that net buying pressure in index put options traded on the International Securities Exchange (ISE) positively and robustly predicts SP specifically in index futures and the ETF on the index, as well as order flow in the underlying index. The contrarian nature of return prediction from option order flow (net put buying predicts a higher index return) suggests that market makers who take the other side of the option orders have private information, and set quotes to attract orders from outside customers and brokers. Supporting the notion that market makers lower spreads to attract trading when they have information, we find that the predictive ability of put order flow for index options is higher when puts are more liquid.

Relief Rallies after FOMC Announcements: How Much Do Investors Care About Uncertainty?

We find substantial positive average stock returns after FOMC announcements accompanied by the release of the Summary of Economic Projections (SEP) and press conference by the Fed Chair. A simple trading strategy of buying index futures contracts five minutes before the announcement and closing the position 55 minutes after the release would have generated an annualized Sharpe ratio of 2.10. We show that the market uncertainty, measured by the VIX index, declines significantly after FOMC meetings followed by SEP releases. After controlling for changes in the VIX, the positive post-announcement returns disappear, suggesting that these returns are related to the resolution of uncertainty after the announcement.

Monetary Policy Uncertainty and the Market Reaction to Macroeconomic News: Evidence from the Taper Tantrum

We examine whether monetary policy uncertainty, related to tapering of the Federal Reserve’s asset purchase program, influences the reaction of the equity, Treasury security, foreign exchange and crude oil markets, as well as medium-term interest rates, to U.S macroeconomic announcements. Using intraday futures data, we show that in the presence of higher policy uncertainty the response to macroeconomic news weakens in the stock and crude oil markets and strengthens in the Treasury, interest rate and foreign exchange markets. These results provide direct evidence that conditioning monetary policy on incoming economic data influences the market reaction to macroeconomic news.

Volatility Forecasting: The Role of Internet Search Activity and Implied Volatility

Growing literature has documented that Internet search activity is associated with volatility in the financial and commodity markets. We reexamine the role of the Internet search activity in the context of volatility prediction in these markets. We broaden the scope by including three traditional predictors (returns, trading volume and implied volatility) and by using not only in-sample but also out-of-sample analysis. We find that implied volatility plays a crucial role in evaluating the contribution of Internet search activity data. Our results show that the predictive role of the Internet search activity data disappears in the stock index and foreign exchange markets and substantially declines in the commodity markets once implied volatility is included in the benchmark model. This finding contributes to our understanding of what informational content is captured by the Internet search activity data. It appears to capture similar information as implied volatility.

Estimating earnings trend using unobserved components framework

Regressions for predicting long-term stock returns often use moving averages of earnings as the earnings trend. We show that the earnings trend can be directly estimated using unobserved components models. The estimated trends improve the fit of predictive regressions.