The Information Content of German Discount Rate Changes
Discount rate changes always receive considerable attention in financial markets and a bulk of empirical papers shows that asset prices react to them. However, among researcher, there is no consensus yet about why markets respond to such changes. This paper analyses this issue for the Bundesbank's discount rate changes after 1979. The empirical results indicate that the overnight rate reacts to changes in the discount rate to the extent that they are unanticipated. In contrast, the response to anticipated changes in the discount rate is much smaller and insignificant. Moreover, the response of the overnight rate cannot be attributed to a direct "borrowing cost effect", but exclusively to announcement effects.
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|Date of creation:||Jul 1996|
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