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Why do markets react badly to good news? Evidence from Fed Funds Futures

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  • Ghent, Andra
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    Abstract

    It is well known that U.S. monetary policy is well-approximated by a Taylor rule. This suggests a reason why good macroeconomic news sometimes depresses equity returns: good news about the real side of the economy implies tighter future monetary policy. I test this hypothesis by assessing the effect of news on equity returns after controlling for changes in expectations of future monetary policy using Fed Funds Futures data. The results do not support the theory. Furthermore, the negative response of stock markets to unanticipated inflation is unchanged by controlling for changes in monetary policy expectations.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1708.

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    Date of creation: 07 Feb 2007
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    Handle: RePEc:pra:mprapa:1708

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    Keywords: Fed Funds Futures. Macroeconomic News Surprises. Taylor Rule;

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    1. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series 2006-23, Federal Reserve Bank of San Francisco.
    2. 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-.
    3. 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.
    4. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-1, University of Pennsylvania, Wharton School, Weiss Center.
    5. James D. Hamilton, 2009. "Daily Changes in Fed Funds Futures Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 567-582, 06.
    6. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    7. John H. Boyd & Ravi Jagannathan & Jian Hu, 2001. "The Stock Market's Reaction to Unemployment News: Why Bad News is Usually Good for Stocks," NBER Working Papers 8092, National Bureau of Economic Research, Inc.
    8. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
    9. Roberto Rigobon & Brian Sack, 2006. "Noisy Macroeconomic Announcements, Monetary Policy, and Asset Prices," NBER Working Papers 12420, National Bureau of Economic Research, Inc.
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