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Asset price reactions to RPI announcements

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  • Michael Joyce
  • Vicky Read

Abstract

This paper examines the same-day reaction of a variety of UK asset prices to monthly RPI inflation announcements over a sample period extending from the early 1980s until April 1997, the month before the Bank of England was given operational independence for setting interest rates. These announcements are decomposed into their expected and unexpected, or 'news', components using survey data on financial analysts' inflation expectations and, as a cross-check, prediction errors from a time-series model of inflation. It is found that markets are efficient, in that asset prices do not respond to the expected component of RPI announcements. Generally, only government bond prices are sensitive to inflation news, and this sensitivity appears particularly marked after late 1992, when the UK adopted an explicit inflation target. The responsiveness of implied medium and long-term forward inflation rates (calculated from conventional and index-linked bonds) during the post-1992 period is consistent with the expected inflation hypothesis, a result that suggests that the pre-independence inflation-targeting framework was not seen as fully credible by the financial markets. Nevertheless, the declining responsiveness of bond yields and implied forward inflation rates to inflation news over the period of operation of the framework suggests that its credibility improved over time.

Suggested Citation

  • Michael Joyce & Vicky Read, 2002. "Asset price reactions to RPI announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 253-270.
  • Handle: RePEc:taf:apfiec:v:12:y:2002:i:4:p:253-270
    DOI: 10.1080/09603100010001090
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    References listed on IDEAS

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    1. Schwert, G William, 1981. "The Adjustment of Stock Prices to Information about Inflation," Journal of Finance, American Finance Association, vol. 36(1), pages 15-29, March.
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    Cited by:

    1. Courtenay, Roger & Clare, Andrew, 2001. "What can we learn about monetary policy transparency from financial market data?," Discussion Paper Series 1: Economic Studies 2001,06, Deutsche Bundesbank.
    2. D Büttner & B. Hayo, 2012. "EMU-related news and financial markets in the Czech Republic, Hungary and Poland," Applied Economics, Taylor & Francis Journals, vol. 44(31), pages 4037-4053, November.
    3. Blaise Gadanecz & Richhild Moessner & Christian Upper, 2007. "Economic derivatives," BIS Quarterly Review, Bank for International Settlements, March.
    4. Coffinet, J. & Frappa, S., 2008. "Macroeconomic Surprises and the Inflation Compensation Curve in the Euro Area," Working papers 220, Banque de France.
    5. Balázs Égert, 2010. "The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa," Open Economies Review, Springer, vol. 21(5), pages 655-677, November.
    6. Robert S. Chirinko & Christopher Curran, 2013. "Greenspan Shrugs: Central Bank Communication, Formal Pronouncements and Bond Market Volatility," CESifo Working Paper Series 4236, CESifo.
    7. Ana Lasaosa, 2007. "Learning the Rules of the New Game? Comparing the Reactions in Financial Markets to Announcements before and after the Bank of England's Operational Independence," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 10(1), pages 18-41, Summer.
    8. María de la O & Francisco JAREÑO, Francisco & SKINNER, Frank S., 2017. "The Financial Crisis Impact: An Industry Level Analysis Of The Us Stock Market González," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 17(2), pages 61-74.
    9. Jones, Brad & Lin, Chien-Ting & Masih, A. Mansur M., 2005. "Macroeconomic announcements, volatility, and interrelationships: An examination of the UK interest rate and equity markets," International Review of Financial Analysis, Elsevier, vol. 14(3), pages 356-375.
    10. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, vol. 6(4), pages 537-554, October.
    11. Refet S. Gürkaynak & Brian P. Sack & Eric T. Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    12. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
    13. Chen, En-Te (John) & Clements, Adam, 2007. "S&P 500 implied volatility and monetary policy announcements," Finance Research Letters, Elsevier, vol. 4(4), pages 227-232, December.
    14. Francisco Jareno, 2008. "Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3159-3171.
    15. Roman Matousek, 2001. "Transparency and Credibility of Monetary Policy in Transition Countries: The Case of the Czech Republic," Archive of Monetary Policy Division Working Papers 2001/37, Czech National Bank.
    16. Andrew Clare & Roger Courtenay, 2001. "Assessing the impact of macroeconomic news announcements on securities prices under different monetary policy regimes," Bank of England working papers 125, Bank of England.
    17. Li, Lifang & Narayan, Paresh Kumar & Zheng, Xinwei, 2010. "An analysis of inflation and stock returns for the UK," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(5), pages 519-532, December.
    18. Antonio Díaz & Francisco Jareño, 2013. "Inflation news and stock returns: market direction and flow-through ability," Empirical Economics, Springer, vol. 44(2), pages 775-798, April.
    19. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Staff Working Papers 01-5, Bank of Canada.

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