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Yield Curve Reaction to Macroeconomic News in Europe : Disentangling the US Influence

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  • Ielpo, Florian
  • Brière, Marie

Abstract

This paper analyses the response of the euro yield curve to macroeconomic and monetary policy announcements. We present a new methodology for estimating the reaction of the euro swap curve to economic news in a data-rich environment. Given the sharp degree of interdependence between euro and US rates, we propose to use the factors of the US yield curve to disentangle the daily variations in euro rates stemming from US influence and the changes resulting from European news. We highlight the importance of taking the influence of the US yield curve into account. For some of the major announcements, results differ appreciably, depending on whether this influence is integrated. We then investigate the shape of the euro term structure reaction to a range of news types, measuring which are the most important economic releases for euro financial markets. In most instances, the curve’s reaction is hump shaped, with the most significant reactions concentrated in intermediate maturities. Finally, we provide a hierarchy of the economic figures that have the strongest impact on each maturity, and show the differences in important news for the short and long end of the curve.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/9305.

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Date of creation: 2009
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Publication status: Published in Consequences of the European monetary integration on financial systems, . pp. 111-135.Length: 24 pages
Handle: RePEc:dau:papers:123456789/9305

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Web page: http://www.dauphine.fr/en/welcome.html
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Keywords: Announcements; news; swap rates; yield curve; interest rates; euro area;

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  1. Ehrmann, Michael & Fratzscher, Marcel, 2002. "Interdependence between the euro area and the US: what role for EMU?," Working Paper Series, European Central Bank 0200, European Central Bank.
  2. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
  3. Dominique Guégan & Florian Ielpo, 2007. "Further evidence on the impact of economic news on interest," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne b07062, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Marie Briere, 2006. "Market Reactions to Central Bank Communication Policies :Reading Interest Rate Options Smiles," Working Papers CEB, ULB -- Universite Libre de Bruxelles 38, ULB -- Universite Libre de Bruxelles.
  5. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1161-91, September.
  6. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  7. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics, Boston College Department of Economics 440, Boston College Department of Economics.
  8. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(2), pages 311-344, April.
  9. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper, Federal Reserve Bank of New York 9706, Federal Reserve Bank of New York.
  10. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2003. "Common factors in international bond returns," Open Access publications from Tilburg University urn:nbn:nl:ui:12-123825, Tilburg University.
  11. Dominique Guégan,Florian Ielpo, 2009. "Further Evidence on the Impact of Economic News on Interest Rates," Frontiers in Finance and Economics, SKEMA Business School, SKEMA Business School, vol. 6(2), pages 1 - 45, October.
  12. Dominique Guegan & Florian Ielpo, 2007. "Further evidence on the impact of economic news on interest rates," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00188331, HAL.
  13. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  14. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 36(04), pages 523-543, December.
  15. Linda Goldberg & Deborah Leonard, 2003. "What moves sovereign bond markets? The effects of economic news on U.S. and German yields," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 9(Sep).
  16. Magnus Andersson & Lars Jul Overby & Szabolcs Sebestyén, 2009. "Which News Moves the Euro Area Bond Market?," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 10, pages 1-31, 02.
  17. Charles T. Carlstrom, 1995. "A monetary policy paradox," Economic Commentary, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Aug.
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Cited by:
  1. Jakob Haan, 2008. "The effect of ECB communication on interest rates: An assessment," The Review of International Organizations, Springer, Springer, vol. 3(4), pages 375-398, December.
  2. Richhild Moessner, 2014. "Effects of ECB balance sheet policy announcements on inflation expectations," DNB Working Papers, Netherlands Central Bank, Research Department 416, Netherlands Central Bank, Research Department.

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