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Rounding and the impact of news: a simple test of market rationality

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  • Meredith Beechey
  • Jonathan H. Wright

Abstract

Certain prominent scheduled macroeconomic news releases contain a rounded number on the first page of the release that is widely cited by newswires and the press and a more precise number in the text of the release. The whole release comes out at once. We propose a simple test of whether markets are paying attention to the rounded or unrounded numbers by studying the high-frequency market reaction to such news announcements. In the case of inflation releases, we find evidence that markets systematically ignore some of the information in the unrounded number. This is most pronounced for core CPI, a prominent release for which the rounding in the headline number is large relative to the information content of the release.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-05.

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Date of creation: 2007
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Handle: RePEc:fip:fedgfe:2007-05

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Keywords: Financial markets;

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  1. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
  2. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
  3. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
  4. Owen A. Lamont & Richard H. Thaler, 2003. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 227-268, April.
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