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Further evidence on the impact of economic news on interest rates

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  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Florian Ielpo

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

Abstract

US interest rates'overnight reaction to macroeconomic announcements is of tremendous importance trading fixed income securities. Most of the empirical studies achieved so far either assumed that the interest rates' reaction to announcements is linear or independent to the state of the economy. We investigate the shape of the tern structure reaction of the swap rates to announcements using several linear and non-linear time series models. The empirical results yield several not-so-well-known stylized facts about the bond market. First, and although we used a daily dataset, we find that the introduction of non linear models leads to the finding of a significant number of macroeconomic figures that actually produce an effect over the yield curve. Most of the studies using daily datasets did not corroborate so far this conclusion. Second, we find that the term structure response to announcements can be much more complicated that what is generally found : we noticed at least four types of patterns in the term structure reaction of interest rates across maturities, including the hump-shaped one that is generally considered. Third, by comparing the shapes of the rates' term structure reaction to announcements with the first four factors obtained when performing a principal component analysis of the daily changes in the swap rates, we propose a first interpretation and classification of these different shapes. Fourth, we find that the existence of some outliers in the one-day changes in interest rates usually leads to a strong underestimation of the reaction of interest rates to announcements, explaining the different results obtained between high-frequency and daily datasets : the first type of study seems to lead to the finding of fewer market mover announcements.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00188331.

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Date of creation: Oct 2007
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Handle: RePEc:hal:cesptp:halshs-00188331

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Related research

Keywords: Macroeconomic announcements; interest rates dynamic; outliers; reaction function; principale component analysis.;

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References

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  1. David Veredas, 2006. "Macroeconomic surprises and short-term behaviour in bond futures," Empirical Economics, Springer, Springer, vol. 30(4), pages 843-866, January.
  2. N. Kundan Kishor & Evan F. Koenig, 2005. "VAR estimation and forecasting when data are subject to revision," Working Papers 0501, Federal Reserve Bank of Dallas.
  3. 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, New York University, Leonard N. Stern School of Business- 98-005, New York University, Leonard N. Stern School of Business-.
  4. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  5. Monika Piazzesi & Eric Swanson, 2004. "Futures Prices as Risk-adjusted Forecasts of Monetary Policy," NBER Working Papers 10547, National Bureau of Economic Research, Inc.
  6. Andrew Ang & Sen Dong & Monika Piazzesi, 2007. "No-Arbitrage Taylor Rules," NBER Working Papers 13448, National Bureau of Economic Research, Inc.
  7. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1861-82, December.
  8. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 31-50.
  9. Hali J. Edison, 1996. "The reaction of exchange rates and interest rates to news releases," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 570, Board of Governors of the Federal Reserve System (U.S.).
  10. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  11. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2005. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," NBER Working Papers 11312, National Bureau of Economic Research, Inc.
  12. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York.
  13. Antulio N. Bomfim, 2003. "Monetary policy and the yield curve," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-15, Board of Governors of the Federal Reserve System (U.S.).
  14. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  15. Hardouvelis, Gikas A., 1988. "Economic news, exchange rates and interest rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 7(1), pages 23-35, March.
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Cited by:
  1. Ielpo, Florian & Brière, Marie, 2009. "Yield Curve Reaction to Macroeconomic News in Europe : Disentangling the US Influence," Economics Papers from University Paris Dauphine 123456789/9305, Paris Dauphine University.
  2. Di Maggio, Marco, 2010. "The Political Economy of the Yield Curve," MPRA Paper 20697, University Library of Munich, Germany.

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