The stock market’s reaction to macroeconomic news under ambiguity

We investigate the quality of the information that macroeconomic news conveys to the stock market about future business conditions. Our econometric approach is consistent with the decision problem of an investor concerned with ambiguity, which allows us to recover a theoretically motivated and empirically tractable proxy of time-varying ambiguity in the stock market. We find the stock market reacts more strongly to negative rather than positive real and monetary macroeconomic news, which is consistent with the predictions of the ambiguity literature. Further, the indirect effect of ambiguous news on investors’ loss of confidence in the signal can contribute up to 80% of the stock market’s reaction. Our findings offer a potential explanation for the weak results of the prior early literature using low-frequency data; they also offer an alternative explanation for the apparent counterintuitive results of the more recent literature using high-frequency data.