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The reception of public signals in financial markets - what if central bank communication becomes stale?

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  • Ehrmann, Michael
  • Sondermann, David

Abstract

How 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 Info

Paper provided by European Central Bank in its series Working Paper Series with number 1077.

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Date of creation: Aug 2009
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Handle: RePEc:ecb:ecbwps:20091077

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Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
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Related research

Keywords: announcement effects; Bank of England; co-ordination of beliefs; inflation reports; Interest Rates; monetary policy; public signals;

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Cited by:
  1. Magdalena Szyszko, 2011. "The interdependences of central bank’s forecasts and economic agents inflation expectations.Empirical study," National Bank of Poland Working Papers 105, National Bank of Poland, Economic Institute.
  2. Matthias Neuenkirch, 2013. "Federal Reserve Communications and Newswire Coverage," MAGKS Papers on Economics 201330, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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