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Further evidence on the impact of economic news on interest rates

  • Ielpo, Florian
  • Guégan, Dominique

US interest rates’ overnight reaction to macroeconomic announcements is of tremendous importance when trading fixed income securities. Most of the empirical studies achieved so far either assumed that the interest rates’ reaction to announcements is linear or independent to the state of the economy. We investigate the shape of the term structure reaction of the swap rates to announcements using several linear and non-linear time series models. The empirical results yield several not-so-well-known stylized facts about the bond market. First, and although we used a daily dataset, we find that the introduction of non linear models leads to the finding of a significant number of macroeconomic figures that actually produce an effect over the yield curve. Most of the studies using daily datasets did not corroborate so far this conclusion. Second, we find that the term structure response to announcements can be much more complicated that what is generally found: we noticed at least four types of patterns in the term structure reaction of interest rates across maturities, including the hump-shaped one that is generally considered. Third, by comparing the shapes of the rates’ term structure reaction to announcements with the first four factors obtained when performing a principal component analysis of the daily changes in the swap rates, we propose a first interpretation and classification of these different shapes. Fourth we find that the existence of some outliers in the one-day changes in interest rates usually leads to a strong underestimation of the reaction of interest rates to announcements, explaining the different results obtained between high-frequency and daily datasets: the first type of study seems to lead to the finding of fewer market mover announcements.

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File URL: http://mpra.ub.uni-muenchen.de/3425/1/MPRA_paper_3425.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3425.

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Date of creation: Dec 2006
Date of revision: Jun 2007
Handle: RePEc:pra:mprapa:3425
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  1. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2004. "Real-time price discovery in stock, bond and foreign exchange markets," CFS Working Paper Series 2004/19, Center for Financial Studies (CFS).
  2. Antulio N. Bomfim, 2003. "Monetary policy and the yield curve," Finance and Economics Discussion Series 2003-15, Board of Governors of the Federal Reserve System (U.S.).
  3. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York.
  4. Monika Piazzesi & Eric Swanson, 2004. "Futures Prices as Risk-adjusted Forecasts of Monetary Policy," NBER Working Papers 10547, National Bureau of Economic Research, Inc.
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  6. Andrew Ang & Sen Dong, 2005. "No-Arbitrage Taylor Rules," 2005 Meeting Papers 22, Society for Economic Dynamics.
  7. 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-.
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  9. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  10. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 31-50.
  11. Hali J. Edison, 1996. "The reaction of exchange rates and interest rates to news releases," International Finance Discussion Papers 570, Board of Governors of the Federal Reserve System (U.S.).
  12. David Veredas, 2006. "Macroeconomic surprises and short-term behaviour in bond futures," Empirical Economics, Springer, vol. 30(4), pages 843-866, January.
  13. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  14. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-82, December.
  15. Hardouvelis, Gikas A., 1988. "Economic news, exchange rates and interest rates," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 23-35, March.
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