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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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File URL: http://mpra.ub.uni-muenchen.de/1708/
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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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Related research
Keywords: Fed Funds Futures. Macroeconomic News Surprises. Taylor Rule.

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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References listed on IDEAS
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  1. Roberto Rigobon & Brian Sack, 2006. "Noisy Macroeconomic Announcements, Monetary Policy, and Asset Prices," NBER Working Papers 12420, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. James D. Hamilton, 2007. "Daily Changes in Fed Funds Futures Prices," NBER Working Papers 13112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics. [Downloadable!]
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  4. John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, vol. 60(2), pages 649-672, 04. [Downloadable!] (restricted)
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  5. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338. [Downloadable!] (restricted)
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  6. 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. [Downloadable!]
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  7. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," PIER Working Paper Archive 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004. [Downloadable!]
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  8. 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. [Downloadable!] (restricted)
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