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Asset Returns, Discount Rate Changes and Market Efficiency

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  • Michael Smirlock
  • Jess B. Yawitz
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    Abstract

    The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the dictinction between "technicral" discount rate changes that are endogenous and "non-technical" changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and announcement effects. In addition, we examine whether the behaviorof these markets in the post-announcement period is consistent with the rapid price adjustment implied by market efficiency.

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    File URL: http://www.nber.org/papers/w1530.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1530.

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    Date of creation: Dec 1984
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    Publication status: published as Smirlock, Michael and Jess B. Yawitz. "Asset Returns, Discount Rate Changend Market Efficiency," Journal of Finance, September 1985.
    Handle: RePEc:nbr:nberwo:1530

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    1. Lombra, Raymond E & Torto, Raymond G, 1977. "Discount Rate Changes and Announcement Effects," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 171-76, February.
    2. V. Vance Roley & Rick Troll, 1984. "The impact of discount rate changes on market interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Jan, pages 27-39.
    3. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-50, March.
    4. Santomero, Anthony M, 1983. " Controlling Monetary Aggregates: The Discount Window," Journal of Finance, American Finance Association, vol. 38(3), pages 827-43, June.
    5. Yawitz, Jess B., 1977. "An Analytical Model of Interest Rate Differentials and Different Default Recoveries," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(03), pages 481-490, September.
    6. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    7. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
    8. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-93, May.
    9. Robert J. Shiller & J. Huston McCulloch, 1987. "The Term Structure of Interest Rates," NBER Working Papers 2341, National Bureau of Economic Research, Inc.
    10. Roley, V Vance, 1983. "The Response of Short-Term Interest Rates to Weekly Money Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 344-54, August.
    11. V. Vance Roley, 1982. "The Response of Short-Term Interest Rates to Weekly Money Announcements," NBER Working Papers 1001, National Bureau of Economic Research, Inc.
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