Ghent, Andra (2007): Why do markets react badly to good news? Evidence from Fed Funds Futures.
Preview |
PDF
MPRA_paper_1708.pdf Download (102kB) | Preview |
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.
| Item Type: | MPRA Paper |
|---|---|
| Institution: | University of California, San Diego |
| Original Title: | Why do markets react badly to good news? Evidence from Fed Funds Futures |
| Language: | English |
| Keywords: | Fed Funds Futures. Macroeconomic News Surprises. Taylor Rule |
| Subjects: | G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy |
| Item ID: | 1708 |
| Depositing User: | Andra Ghent |
| Date Deposited: | 08 Feb 2007 |
| Last Modified: | 02 Oct 2019 04:30 |
| References: | Andersen, T.G., T. Bollerslev, F.X. Diebold, and C. Vega, 2003. Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange. American Economic Review 93, 38-62. Andersen, T.G., T. Bollerslev, F.X. Diebold, and C. Vega, 2005. Real-Time Price Discovery in Stock, Bond, and Foreign Exchange Markets. Manuscript, University of Pennsylvania. Balduzzi, P., E.J. Elton, and T.C. Green, 2001. Economic News and Bond Prices: Evidence from the U.S. Treasury Market. Journal of Financial and Quantitative Analysis 36, 523-543. Boyd, J.H., J. Hu, and R. Jagannathan, 2005. The Stock Market's Reaction to Unemployment News: Why Bad News is Usually Good for Stocks. Journal of Finance 60, 649-672. Diebold, F.X., G.D. Rudebusch, and S.B. Arouba, 2006. The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach. Journal of Econometrics 131, 309-338. Goto, S. and R. Valkanov, 2002. The Fed's Effect on Expected Returns and Inflation is Bigger than You Think. Manuscript, University of California, San Diego. Hamilton, J.D., 2007. Daily Changes in Fed Funds Futures Prices. Manuscript, University of California, San Diego. K.N. Kuttner, 2001. Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market. Journal of Monetary Economics 47, 523-544. McQueen, G. and V.V. Roley, 1993. Stock Prices, News, and Business Conditions. Review of Financial Studies 6, 683-707. Piazzesi, M. and E. Swanson, 2006. Future Prices as Risk-Adjusted Forecasts of Monetary Policy. Manuscript, University of Chicago. Rigobon, R. and B. Sack, 2006. Noisy Macroeconomic Announcements, Monetary Policy, and Asset Prices. NBER Working Paper 12420 (Cambridge, MA). Ritter, J.R., and R.S. Warr, 2002. The Decline of Inflation and the Bull Market of 1982-1989. Journal of Financial and Quantitative Analysis 37, 29-61. |
| URI: | https://mpra.ub.uni-muenchen.de/id/eprint/1708 |
All papers reproduced by permission. Reproduction and distribution subject to the approval of the copyright owners.
| View Item |