The reception of public signals in financial markets - what if central bank communication becomes stale?
AbstractHow do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to macroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses. JEL Classification: E58, E43, G12, G14
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1077.
Date of creation: Aug 2009
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Other versions of this item:
- Michael Ehrmann & David Sondermann, 2009. "The reception of public signals in financial markets – what if central bank communication becomes stale?," National Bank of Poland Working Papers 66, National Bank of Poland, Economic Institute.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-30 (All new papers)
- NEP-CBA-2009-08-30 (Central Banking)
- NEP-CTA-2009-08-30 (Contract Theory & Applications)
- NEP-EEC-2009-08-30 (European Economics)
- NEP-MAC-2009-08-30 (Macroeconomics)
- NEP-MON-2009-08-30 (Monetary Economics)
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- Matthias Neuenkirch, 2014.
"Federal Reserve Communications and Newswire Coverage,"
Working Papers CEB
14-003, ULB -- Universite Libre de Bruxelles.
- Matthias Neuenkirch, 2014. "Federal Reserve communications and newswire coverage," Applied Economics, Taylor & Francis Journals, vol. 46(25), pages 3119-3129, September.
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National Bank of Poland Working Papers
105, National Bank of Poland, Economic Institute.
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