Economic news is likely to affect the prices of financial assets as market participants reassess their views about the economy’s current state and its future evolution. The effects may vary, however, with the type of information being announced and the instrument being priced. For example, shifts in inflation or growth expectations are likely to affect bond yields and exchange rates, whereas changes in unemployment numbers or GDP are likely to be more closely associated with stock prices.
Early studies of announcement effects compared asset price responses to those predicted by empirical forecasting models. Such comparisons, however, introduced measurement errors into the estimates of the asset price response. The authors have developed a methodology, called the Rigobon–Sack approach, that removes these measurement errors and thereby yields estimates of the impact of true news on asset prices.
This approach produces results that are much closer to those of other, standard methods for estimating the impact of economic news on asset prices. Their results show that only a few economic announcements generate price responses that are economically significant and measurably persistent through the day. The strongest effects are found in the bond markets, while stock prices show the weakest and most erratic responses.
The authors also investigate the direction of these effects. The analysis suggests that the release of unexpectedly strong-than-expected growth and inflation news prompts a rise in bond yields and an appreciation in the dollar’s exchange value, while the opposite is true for unexpectedly weak-than-expected news.
About the Author
