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Macroeconomic news and price synchronicity

Journal: Journal of Empirical Finance

Date: 2023

Author: Arbab K. Cheema, Arman Eshraghi, Qingwei Wang

Abstract:
Stock price synchronicity is a critical consideration for asset allocation, risk assessment, and hedging decision. We present novel evidence that individual stock returns comove more persistently on certain days of the week. Specifically, we show that release of macroeconomic news on Mondays, which typically see fewer announcements, leads to such stronger comovement, and that this is distinct from the Monday effect typically discussed in the literature. This synchronicity is more pronounced among large, old and low volatility firms, in both up- and down-market conditions. We argue this effect is partly due to 'simultaneous contrast', i.e., perception of stimulus depending on its surrounding environment. Monday announcements have a larger impact just as thunder in a quiet night sounds louder. Our findings are robust after controlling for day-of-the-week effects, economic uncertainty, risk aversion, investor sentiment, short-selling constraints and proxies for attention to news.

Link: Google Scholar

Background and Context

Research Focus

The study examines how individual stock returns move together with market and industry portfolio returns, particularly focusing on intra-week variations in this synchronicity pattern.

Data Coverage

The analysis covers US stocks from 1953 to 2017, examining daily stock returns, macroeconomic announcements, and earnings releases to understand patterns in price movements.

Methodology

Researchers analyzed synchronicity by regressing individual stock returns against market and industry returns for each weekday, comparing R-squared values across different days.

Higher Stock Return Synchronicity on Mondays

  • Monday shows consistently higher synchronicity (R² = 21.77%) compared to other weekdays
  • Other weekdays show similar levels of synchronicity around 19-20%
  • This pattern suggests a systematic difference in how stocks move together on Mondays

Impact of Macroeconomic Announcements on Monday Synchronicity

  • Monday synchronicity is dramatically higher (47.05%) on days with macroeconomic announcements
  • Effect of announcements is much smaller on other weekdays
  • Shows the unique sensitivity of Monday trading to macroeconomic news

Distribution of Macroeconomic Announcements Across Weekdays

  • Mondays have the fewest macroeconomic announcements (136)
  • Fridays have the highest number of announcements (563)
  • This contrast makes Monday announcements more salient when they do occur

Market Conditions Impact on Monday Synchronicity

  • Monday synchronicity remains higher in both up and down markets
  • Down market conditions show stronger synchronicity across all days
  • Pattern persists regardless of market direction

Firm Characteristics and Monday Synchronicity

  • Large and old firms show stronger Monday synchronicity
  • Low volatility firms exhibit particularly strong Monday effects
  • Suggests the effect is not driven by small or speculative stocks

Contribution and Implications

  • First study to document systematic differences in stock return synchronicity across weekdays
  • Demonstrates how the contrast effect influences market-wide stock price movements
  • Provides important insights for investors regarding timing of trades and risk management
  • Highlights the importance of considering day-of-week effects in portfolio management

Data Sources

  • Weekday synchronicity data from Table 1 of the article
  • Macroeconomic announcement effects from Figure 3, Panel A
  • Announcement distribution data from Figure 2, Panel A
  • Market conditions analysis from Table 7
  • Firm characteristics data from Table 8