Economic news typically leads to adjustments in asset prices as market participants reassess their views of the economy’s current state and its likely future evolution. These market responses to economic announcements are often significant and measurably persistent across time, but they can be difficult to measure. In this article, we explore how to do so using an approach known as Rigobon-Sack. This method essentially cleans measured asset price responses of the measurement errors that are associated with survey-based measures of expected indicator data. The result is estimated asset price responses that are much more closely related to true news than those estimated with the standard OLS method.
Our results indicate that a wide variety of economic news announcements have statistically significant and measurably persistent effects on bond yields, stock prices, and foreign exchange rates. For the most part, these effects support the traditional view that assets rise in response to expectations of stronger growth and faster inflation. The strongest effect is on bond yields, followed by stocks and the dollar.
However, we also find that some news announcements have no or only weak effects on these markets. These findings may be due to a host of factors, including: (1) the timing of the news release; (2) the nature of the announced surprise (e.g., whether it is positive or negative); (3) the extent to which other news is correlated with the announced surprise; and (4) the presence of domestic or foreign policy developments.
About the Author
