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Not so fast: high-frequency financial data for macroeconomic event studies

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  • Ozdagli, Ali K.

    ()
    (Federal Reserve Bank of Boston)

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    Abstract

    Over the last decade, it has become increasingly popular to use event studies with intraday asset pricing data to study the effect of macroeconomic events on the economy. The proponents of this approach argue that asset prices react to macroeconomic events very quickly and that if we know the precise timing of a macroeconomic announcement, a very narrow event window around such an announcement (ranging from 30 minutes to 60 minutes) should be sufficiently long and free from contaminating information that might otherwise cause biased estimates in wider event windows. In contrast, this paper argues that even narrow event windows can lack clean identification because the reaction of asset prices may be affected by other important news that comes out earlier on the same day. We support this argument by studying the relationship between federal funds futures and other asset prices (stocks and Treasuries) on FOMC announcement dates, a relationship widely studied in high-frequency event studies to identify the effect of conventional monetary policy shocks on asset prices. We find that asset prices react significantly more strongly to monetary policy shocks on FOMC announcement dates that overlap with other macroeconomic announcements that come out earlier on the same day. We also find a stronger reaction of asset prices when markets are more volatile. This finding suggests that limitations of investors, such as through rational inattention or asymmetric information, might matter in these event studies. Consequently, one should be cautious before arguing that high-frequency (intraday) event studies adequately address the contamination issues that plague the methods that use low-frequency data.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 13-19.

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    Length: 29 pages
    Date of creation: 01 Dec 2013
    Date of revision:
    Handle: RePEc:fip:fedbwp:13-19

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    1. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
    2. Refet S. Gürkaynak & Jonathan H. Wright, 2013. "Identification and Inference Using Event Studies," Manchester School, University of Manchester, vol. 81, pages 48-65, 09.
    3. Wongswan, Jon, 2009. "The response of global equity indexes to U.S. monetary policy announcements," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 344-365, March.
    4. Jain, Prem C, 1988. "Response of Hourly Stock Prices and Trading Volume to Economic News," The Journal of Business, University of Chicago Press, vol. 61(2), pages 219-31, April.
    5. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What explains the stock market's reaction to Federal Reserve policy?," Finance and Economics Discussion Series 2004-16, Board of Governors of the Federal Reserve System (U.S.).
    6. Jonathan H. Wright, 2012. "What does Monetary Policy do to Long‐term Interest Rates at the Zero Lower Bound?," Economic Journal, Royal Economic Society, vol. 122(564), pages F447-F466, November.
    7. John Ammer & Clara Vega & Jon Wongswan, 2010. "International Transmission of U.S. Monetary Policy Shocks: Evidence from Stock Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 179-198, 09.
    8. Hussain, Syed Mujahid, 2011. "Simultaneous monetary policy announcements and international stock markets response: An intraday analysis," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 752-764, March.
    9. León, Ángel & Sebestyén, Szabolcs, 2012. "New measures of monetary policy surprises and jumps in interest rates," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2323-2343.
    10. Yuriy Gorodnichenko & Michael Weber, 2013. "Are Sticky Prices Costly? Evidence From The Stock Market," NBER Working Papers 18860, National Bureau of Economic Research, Inc.
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