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Noisy Macroeconomic Announcements, Monetary Policy, and Asset Prices

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  • Roberto Rigobon
  • Brian Sack

Abstract

The current literature has provided a number of important insights about the effects of macroeconomic data releases on monetary policy expectations and asset prices. However, one puzzling aspect of that literature is that the estimated responses are quite small. Indeed, these studies typically find that the major economic releases, taken together, account for only a small amount of the variation in asset prices%u2014even those closely tied to near-term policy expectations. In this paper we argue that this apparent detachment arises in part from the difficulties associated with measuring macroeconomic news. We propose two new econometric approaches that allow us to account for the noise in measured data surprises. Using these estimators, we find that asset prices and monetary policy expectations are much more responsive to incoming news than previously believed. Our results also clarify the set of facts that should be captured by any model attempting to understand the interactions between economic data, monetary policy, and asset prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12420.

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Date of creation: Aug 2006
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Publication status: published as Noisy Macroeconomic Announcements, Monetary Policy, and Asset Prices , Roberto Rigobon, Brian Sack. in Asset Prices and Monetary Policy , Campbell. 2008
Handle: RePEc:nbr:nberwo:12420

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  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange?," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 02-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 425-436, March.
  3. Fair, Ray C., 2003. "Shock effects on stocks, bonds, and exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 22(3), pages 307-341, June.
  4. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 36(04), pages 523-543, December.
  5. James H. Stock & Mark W. Watson, 2001. "Forecasting Output and Inflation: The Role of Asset Prices," NBER Working Papers 8180, National Bureau of Economic Research, Inc.
  6. Refet Gürkaynak & Justin Wolfers, 2005. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 11-50 National Bureau of Economic Research, Inc.
  7. 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.
  8. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 784, Board of Governors of the Federal Reserve System (U.S.).
  9. David H. Cutler & James M. Poterba & Lawrence H. Summers, 1988. "What Moves Stock Prices?," Working papers 487, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Paolo Pasquariello & Clara Vega, 2006. "Informed and strategic order flow in the bond markets," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 874, Board of Governors of the Federal Reserve System (U.S.).
  11. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What explains the stock market's reaction to Federal Reserve policy?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-16, Board of Governors of the Federal Reserve System (U.S.).
  12. Owen Lamont, 1995. "Macroeconomics Forecasts and Microeconomic Forecasters," NBER Working Papers 5284, National Bureau of Economic Research, Inc.
  13. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(8), pages 1553-1575, November.
  14. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, American Finance Association, vol. 54(5), pages 1901-1915, October.
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Cited by:
  1. Aymen Belgacem, 2009. "Fundamentals, Macroeconomic Announcements and Asset Prices," EconomiX Working Papers 2009-16, University of Paris West - Nanterre la Défense, EconomiX.
  2. Ghent, Andra, 2007. "Why do markets react badly to good news? Evidence from Fed Funds Futures," MPRA Paper 1708, University Library of Munich, Germany.
  3. Hanousek, Jan & Kocenda, Evzen & Kutan, Ali M., 2009. "The reaction of asset prices to macroeconomic announcements in new EU markets: Evidence from intraday data," Journal of Financial Stability, Elsevier, Elsevier, vol. 5(2), pages 199-219, June.
  4. Aulerich, Nicole M. & Irwin, Scott H. & Nelson, Carl H., 2007. "The Impact of Measurement Error on Estimates of the Price Reaction to USDA Crop Reports," 2007 Conference, April 16-17, 2007, Chicago, Illinois, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management 37579, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  5. Jan Hanousek & Evzen Kocenda, 2009. "Intraday Price Discovery in Emerging European Stock Markets," CERGE-EI Working Papers wp382, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  6. Fornari, Fabio, 2010. "Assessing the compensation for volatility risk implicit in interest rate derivatives," Journal of Empirical Finance, Elsevier, Elsevier, vol. 17(4), pages 722-743, September.
  7. Markku Lanne, 2009. "Properties of Market-Based and Survey Macroeconomic Forecasts for Different Data Releases," Economics Bulletin, AccessEcon, vol. 29(3), pages 2231-2240.
  8. Fratzscher, Marcel, 2007. "US shocks and global exchange rate configurations," Working Paper Series, European Central Bank 0835, European Central Bank.
  9. Marlene Amstad & Andreas M. Fischer, 2009. "Do macroeconomic announcements move inflation forecasts?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 507-518.

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