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On the "Hirshleifer effect'' of unscheduled monetary policy announcements

  • Banerjee, Anurag N.
  • Seccia, Giulio
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    When monetary policy announcements are expected to occur at scheduled dates, the event of an unscheduled announcement often "surprises" financial markets. However, if the information provider knows the future policy beforehand, he might be induced to anticipate the release of information without waiting for the next scheduled date, on the assumption that better informed traders will be able to attain superior equilibria. On October 15,.1998, January 3 and April 18, 2001 the chairman of U.S. Fed announced a half point interest rate cut well before the next scheduled meeting. The real surprise for the markets was the timing, not the content, of the announcement. In this paper we look at the volume of trade in interest rate futures before these three dates and compare it to the volume of trade before scheduled meetings. We argue that the wrong timing of policy announcements might involve an "Hirshleifer effect" and prevent a significant volumes of securities to transact for hedging purposes.

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    File URL: http://eprints.soton.ac.uk/33396/1/0213.pdf
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    Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0213.

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    Date of creation: 01 Jan 2002
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    Handle: RePEc:stn:sotoec:0213
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    1. Alessandro Citanna & Antonio Villanacci, . "Incomplete markets, allocative efficiency and the information revealed by prices," GSIA Working Papers 10, Carnegie Mellon University, Tepper School of Business.
    2. Marshall, John M, 1974. "Private Incentives and Public Information," American Economic Review, American Economic Association, vol. 64(3), pages 373-90, June.
    3. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
    4. Berk Jonathan B. & Uhlig Harald, 1993. "The Timing of Information in a General Equilibrium Framework," Journal of Economic Theory, Elsevier, vol. 59(2), pages 275-287, April.
    5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    6. Polemarchakis, H M & Siconolfi, P, 1993. "Asset Markets and the Information Revealed by Prices," Economic Theory, Springer, vol. 3(4), pages 645-61, October.
    7. Burkhard Drees & Bernhard Eckwert, 2002. "Welfare Effects of Transparency in Foreign Exchange Markets; The Role of Hedging Opportunities," IMF Working Papers 02/219, International Monetary Fund.
    8. Polemarchakis, H. M. & Seccia, G., 2000. "A Role for Monetary Policy when Prices Reveal Information: An Example," Journal of Economic Theory, Elsevier, vol. 95(1), pages 107-115, November.
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