Economic news affects asset prices in a variety of ways. Small unexpected changes in some indicators can rock stock prices, while shifts in others may be shrugged off by the markets. Some announcements influence bond yields and exchange rates, while others are more likely to affect stock prices.
Basic economic thinking would lead us to expect certain rela- tions between economic news and interest rates, as measured by the yield on U.S. Treasury securities and Eurodollar futures contracts. Specifically, we might expect that news of surprising economic strength or rising inflationary pressures will push up interest rates, prompting the central bank to pursue tighter monetary policy than expected.
But what exactly drives these relations? Some research focuses on market expectations, which are captured by survey data. These surveys are typically conducted in advance of the release of data, with leads ranging from a few days to a week or more. As a result, by the time the data is released, a large amount of new information about the data has already accumulated in markets. This information can be measured as “measured news” (that is, the new information minus the indicator’s forecast one instant before the release). Earlier studies of the effects of economic announcements on asset prices have defined news with respect to the predictions of an empirical forecasting model—a practice that made the resulting measure of the impact of news dependent on the model chosen. The Rigobon and Sack method corrects this problem by estimating the effect of measured news on asset prices using regressions with the actual data as the dependent variable.
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