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.
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Bibliographic InfoPaper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 66.
Date of creation: 2009
Date of revision:
Note: The paper was presented at the National Bank of Poland’s conference ”Publishing Central Bank Forecast in Theory and Practice” held on 5–6 November 2009 in Warsaw.
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More information through EDIRC
public signals; inflation reports; monetary policy; interest rates; announcement effects; co-ordination of beliefs; Bank of England;
Other versions of this item:
- Ehrmann, Michael & Sondermann, David, 2009. "The reception of public signals in financial markets - what if central bank communication becomes stale?," Working Paper Series 1077, European Central Bank.
- 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
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-30 (All new papers)
- NEP-CBA-2010-01-30 (Central Banking)
- NEP-CTA-2010-01-30 (Contract Theory & Applications)
- NEP-FMK-2010-01-30 (Financial Markets)
- NEP-MAC-2010-01-30 (Macroeconomics)
- NEP-MON-2010-01-30 (Monetary Economics)
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- Magdalena Szyszko, 2013.
"The interdependences of central bank’s forecasts and inflation expectations of consumers,"
Bank i Kredyt,
National Bank of Poland, Economic Institute, vol. 44(1), pages 33-66.
- 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.
- 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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