Discount rate changes , stock market returns , volatility , and trading volume : Evidence from intraday data and implications for market e ciency q

Abstract

We examine the e€ect of discount rate changes on stock market returns, volatility, and trading volume using intraday data. Equity returns generally respond negatively and signi®cantly to the unexpected announcements; however, the e€ect of expected changes on equity returns is insigni®cant. Furthermore, our results indicate that equity prices respond to announcements within the trading period/hour after the information release. An indication of a return reversal is too small to cover the full transaction costs. Unexpected discount rate changes also contribute to higher market volatility although the volatility is short-lived. Similarly, unexpected changes in discount rates induce larger trading volume while expected changes do not. Abnormal trading volume occurs only in period t. Our results also support the notion that unexpected changes in the discount rates impact market returns irrespective of the Federal Reserve operating procedures. Ó 1999 Elsevier Science B.V. All rights reserved. JEL classi®cation: G10; G14; E52 Journal of Banking & Finance 23 (1999) 897±924 www.elsevier.com/locate/econbase q An earlier version of the paper was presented at the 1996 Financial Management Association Meetings. The authors acknowledge the helpful comments of two anonymous referees. * Corresponding author. Tel.: 1 937 229 2418; fax: 1 937 229 2477; e-mail: chen@udayton.edu 0378-4266/99/$ ± see front matter Ó 1999 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 4 2 6 6 ( 9 8 ) 0 0 1 1 8 6

7 Figures and Tables

Cite this paper

@inproceedings{Chen1999DiscountRC, title={Discount rate changes , stock market returns , volatility , and trading volume : Evidence from intraday data and implications for market e ciency q}, author={Carl R. Chen and Nancy J. Mohan and Thomas L. Steiner}, year={1999} }