Why Do Certain Macroeconomic News Announcements Have A Big Impact On
Why Do Certain Macroeconomic News Announcements Have A Big Impact On Asset Prices? Thomas Gilbert Chiara Scotti Clara Vega Georg Strasser University of Washington Federal Reserve Board Boston College 6th ECB Workshop on Forecasting Techniques Frankfurt, March 5-6, 2010 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 1 Introduction Asset Price Impact Motivation Plan of the Talk Why? Why do some macroeconomic news releases have a big impact on asset prices while others do not? Macroeconomic announcements differ in the amount of information they convey to market participants about the current and future state of the economy and in the way they convey this information. For this reason, some announcements have a significantly larger price impact than others. Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 2 Introduction Asset Price Impact Motivation Plan of the Talk The Value of Public Information This price impact is driven by four factors: 1 Timeliness 2 Precision 3 Real-Time Intrinsic Value / R-T Information Content 4 Ex-Post Intrinsic Value / E-P Information Content (not in presentation) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 3 Introduction Asset Price Impact Motivation Plan of the Talk Asset Price Impact Theoretical Framework Empirical Framework Results Conclusions Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 4 Introduction Asset Price Impact Data Results Announcement Surprises, Asset Prices k rt = α + βk Sp,t(p) + εt Surprises: k = Sp,t k Akp,t −Ep,t k σS k : median of ∼40 forecasters from Money Expectations Ep,t Market Services and Bloomberg Asset Prices: Liquid futures contracts with low transaction costs Tick-by-tick transaction prices starting at 8.20am EST 5-minute continuously compounded returns Common sample: 01/1994 to 12/2008 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 5 Introduction Asset Price Impact Data Results Event Study Results k + εt rt = α + βk Sp,t(p) Announcement Eurodollar T-Note $/GBP Nonfarm Payroll -0.03** 36% -0.26** 35% -0.10** 20% Unemployment Rate GDP Advanced NAPM Index 0.02** -0.01** -0.01** 10% 19% 40% 0.14** -0.13** -0.12** 9% 26% 44% 0.04** -0.09** -0.03** 3% 36% 10% Core CPI Consumer Confidence -0.01** -0.01** 20% 29% -0.09** -0.07** 25% 40% -0.02** -0.03** 5% 16% CPI Trade Balance Business Inventories -0.00** -0.00 0.00 3% 1% 0% -0.04** -0.01 0.01 5% 0% 0% -0.00 -0.07** 0.00 0% 35% -1% Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 6 Introduction Asset Price Impact Data Results Linking Announcements and Asset Prices Existing literature: direct link between macroeconomic news announcements and asset prices This paper: disentangle this link Which properties make an announcement valuable? Through which channels do macro announcements affect asset prices? Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 7 Theoretical Framework Empirical Framework Results Model Understanding the model Case 1: analyze Timeliness and Precision fixing Information Content (2 period model with 1 state) Case 2: analyze Information Content fixing Timing and Precision (1 period model with 2 states) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 8 Theoretical Framework Empirical Framework Results Model case 1: 2 periods, 1 state (Niessen and Hess) Two announcements: A1 = X + ε1 released at time t = 1 A2 = X + ε2 released at time t = 2 with εi ∼ N(0, ρ1Ai ), i = 1, 2 Investors form homogeneous and normally distributed expectations with respect to X at each point in time: µF0 is the market expectation of the state of the economy X at time t = 0 ρF0 is its precision Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 9 Theoretical Framework Empirical Framework Results Model case 1: 2 periods, 1 state - cont’d After the first announcement µF1 − µF0 = (X + εA1 − µF0 ) ρA1 ρF0 + ρA1 (1) and the precision of this market belief is ρF1 = ρF0 + ρA1 Similarly, after the second announcement : µF2 − µF1 = (X + εA2 − µF1 ) ρA2 ρF1 + ρA2 (2) and the precision of this market belief is ρF2 = ρF1 + ρA2 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 10 Theoretical Framework Empirical Framework Results Model case 1: 2 periods, 1 state - cont’d ∆Pt = νπt St for t = 1 ∆P1 = ν ρA1 (µA1 − µF1 ) ρF0 + ρA1 ∆P2 = ν ρA2 (µA2 − µF2 ) ρF1 + ρA2 for t = 2 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 11 Theoretical Framework Empirical Framework Results Model case 1: 2 periods, 1 state - cont’d Timeliness: assume ρA1 = ρA2 π1 = ρA1 ρA1 ρA2 = > = π2 ρF0 + ρA1 ρF1 ρF1 + ρA2 ′ Precision: assume ρA1 > ρA1 ′ ρA1 ρA1 π1 = > = π1′ ρF1 ρF1 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 12 Theoretical Framework Empirical Framework Results Model case 2: 1 period, 2 states Two announcements and two states: X = X1 + X2 A1 = X1 + ε1 A2 = X2 + ε2 with εi ∼ N(0, ρ1Ai ), i = 1, 2 ρA1 (µA1 − µF1 ) ρF1 + ρA1 ρA2 ∆P2 = ν2 π2 S2 = ν (µA2 − µF2 ) ρF2 + ρA2 ∆P1 = ν1 π1 S1 = ν Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 13 Theoretical Framework Empirical Framework Results Model case 2: 1 period, 2 states - cont’d Assume ρA1 = ρA2 and ρF1 < ρF2 then π1 = ρA1 ρA1 > = π2 ρF1 + ρA1 ρF2 + ρA1 ρF1 < ρF2 ⇒ Var(X1 ) > Var(X2 ) ⇒ Cov(A1 , X) > Cov(A2 , X) ⇒ the announcement that comoves more with X (has the highest information content) is the one with the biggest price impact! Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 14 Theoretical Framework Empirical Framework Results Timeliness and Noise Information Content (Real Time) Calendar of Macroeconomic Announcements Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 15 Theoretical Framework Empirical Framework Results Timeliness and Noise Information Content (Real Time) Timeliness and Noise Timeliness = date(release) - date(end of reference period) Noise = revision(s) of initial announcement k k F − A p 1 p,t(p) P∑ p σ Fpk −Akp,t(p) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 16 Theoretical Framework Empirical Framework Results Timeliness and Noise Information Content (Real Time) Measuring the Real-Time Information Content We measure the information content of a variable with its ability to explain (nowcast/forecast) GDP and GDP deflator FOMC decisions Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 17 Theoretical Framework Empirical Framework Results Timeliness and Noise Information Content (Real Time) Nowcasts: Data Structure Evans (IJCB 2005) and Giannone, Reichlin, Small (JME 2008) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 18 Theoretical Framework Empirical Framework Results Timeliness and Noise Information Content (Real Time) Forecasting and Nowcasting Forecasting FFTR changes: Ordered probit model (Hamilton and Jord`a, 2002) y∗t y∗t GDPDef ′ = βk′ · Now∆GDP + εt′ p,t−1 + γk · Nowp,t−1 versus GDPDef = βk · Now∆GDP + δk · Akp,t + εt p,t−1 + γk · Nowp,t−1 Nowcasting GDP and Inflation: ∆GDPp,t+τ ∆GDPp,t+τ ′ = αk′ + βk′ · Now∆GDP p,t−1 + εp versus k = αk + βk · Now∆GDP p,t−1 + γk · Ap,t + εp Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 19 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Timeliness and Noise Announcement Median Reporting Lag Average Noise NAPM Index 1 1.14 Consumer Confidence Index -3 1.17 Unemployment Rate Nonfarm Payroll 5 5 0.81 1.32 Average Hourly Earnings 5 1.04 PPI Core PPI 13 13 1.05 0.87 Industrial Production Capacity Utilization 16 16 1.33 1.59 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 20 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Forecasting FOMC Decisions Now∆GDP NowGDPDef NAPM 0.40*** 0.37* NAPM 0.18* 0.10 NFP 0.44*** 0.38* NFP 0.33** 0.35 Unemp. 0.44*** 0.38* Unemp. 0.39*** 0.40* CPI 0.46*** 0.52** CPI 0.43*** 0.42* Ak LR p(LR) 0.158*** 40.0 0.00 0.002** 4.7 0.03 -1.165* 3.0 0.08 0.703* 3.4 0.07 Also significant: Housing Starts, New Home Sales, Retail Sales Less Autos, and Capacity Utilization Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 21 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Information Content Announcement FOMC GDP GDP P NAPM Index +++ +++ 0 0 0 0 + ++ + ++ + ++ Average Hourly Earnings 0 0 0 PPI Core PPI 0 0 0 0 +++ ++ Industrial Production 0 ++ 0 Capacity Utilization + 0 0 Consumer Conf. Index Unemployment Rate Nonfarm Payroll Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 22 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance What Matters Most? rt = β0 + βS St + βST St Tt + βSN St Nt + βSI St It + εt Real-time intrinsic value It : absolute value of weight of Ak(t) in nowcast of next GDPadv. or GDPdefladv. release at time t Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 23 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance GDP Channel vs. GDP Deflator Channel Variable S¯ S¯ × T¯ S¯ × I¯ S¯ × N¯ const. GDP Channel GDP Deflator Channel -0.72*** (0.16) 0.02*** (0.00) -3.24*** (0.83) 0.14*** (0.04) -0.00 (0.05) -1.25*** (0.14) 0.03*** (0.01) -0.88 (1.11) 0.13*** (0.04) -0.01 (0.05) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 24 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Composition of Announcement Impact Surprise Intr. Value Timing Noise Net Effect 0 -0.56 -0.72 -0.5 0.14 -0.35 0.37 -1 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 25 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Calculating Marginal Effects Effect of one-standard-deviation surprise: rtS − rt = βˆS σS + βˆST σS T¯ t + βˆSN σS N¯ t + βˆSI σS I¯t Marginal effect of e.g. timing of announcement: rtST − rtS = βˆST σS + S¯ t σT Evaluate at mean, shock by one s.d. Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 26 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Marginal Effects GDP Channel Variable Surprise Timing Intrinsic Value Noise Effect -0.53 0.25 -0.20 0.13 Gilbert, Scotti, Strasser, Vega Wald test p(W) 108.4 22.0 15.2 12.6 0.00 0.00 0.00 0.00 Why Macroeconomic Announcements Move Prices 27 Theoretical Framework Empirical Framework Results Timeliness and Noise Real-time Information Content Relative Importance Marginal Effects GDP Channel, Real Activity Only Variable Surprise Timing Intrinsic Value Noise Effect -0.44 0.18 -0.31 0.14 Gilbert, Scotti, Strasser, Vega Wald test p(W) 75.8 10.6 30.6 14.1 0.00 0.00 0.00 0.00 Why Macroeconomic Announcements Move Prices 28 Conclusion Conclusions 1 2 3 We disentangled the price impact of news announcements into timeliness, precision and information content (intrinsic value) Intrinsic value and Timeliness dominate price impact, noise less important GDP channel dominates Inflation channel in Eurodollar market Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 29 Conclusion Future Work 1 2 3 International evidence What causes foreign markets to react more to U.S. macro announcements than to their own? Coordination Rational overreaction to NFP instead of NAPM due to coordination value beyond intrinsic value? (Morris and Shin, AER 2002) Equity markets: Impact of business cycle Effect of opposite impact of real activity variables on equity returns in recessions versus expansions Effect of smaller revisions during recessions Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 30 Backup Nowcasts: Kalman Filter and Smoothing Out-of-sample nowcast for announcement Akp,t released at time t > T based on information until time t ˜f Aˆ kp,T = αˆ t + βˆt Φ p,T f ˜ p,t is average Kalman-smoothed forecast of latent where Φ factors Principal component analysis: calculate 3 factors Φp,t from all macro series State equation modified VAR(1) Φp,t = Bm(p−1),t Φp−1,t + Cm(p−1),t νp−1,t , νp,t ∼ WN(0, I2 ) Observation equation Ap,t = Dt Φp,t + εt , εt ∼ WN(0, R30 ) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 31 Backup BACKUP: A Loss Function Z P ∑ p=1 E 2 xp (t) − xp dt, where xp is the true value, and xEp (t) = E [xp |Ω(t)] Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 32 Backup BACKUP: Information Content of Ak Additional information that announcements Akp,t carry in forecasting the target variable, given all the information released until time t j k j E F Ω(t), A ∑ p p,t − E Fp |Ω(t) , p where t = t(p, k) Nowcast/forecast current (unknown) state of economy (Quarterly) GDP growth GDP Price Index Federal Funds Target interest Rate (FFTR) Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 33 Backup BACKUP: Simultaneous Announcements Announcement coeff. t-stat Adj. R2 Unemployment Rate 1.20 4.64 46.1% Nonfarm Payroll -2.82 -10.60 Average Hourly Earnings -0.97 -3.71 Retail Sales -0.66 -4.01 26.4% Retail Sales Less Autos -0.47 -2.83 Capacity Utilization -0.32 -2.93 15.5% Industrial Production -0.08 -0.78 PPI -0.27 -1.82 13.9% Core PPI -0.54 -3.72 CPI 0.08 0.56 19.7% Core CPI -0.90 -6.04 Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 34 Backup BACKUP: Calculating Marginal Effects rt = βˆ0 + βˆS S¯ t + βˆST S¯ t T¯ t + βˆSN S¯ t N¯ t + βˆSI S¯ t I¯t For marginal effect of surprise rtS = βˆ0 + βˆS σS + S¯ t + βˆST σS + S¯ t T¯ t + βˆSN σS + S¯ t N¯ t + βˆSI σS + S¯ t I¯t For marginal effect of the timing of the announcement rtST = βˆ0 + βˆS σS + S¯ t + βˆST σS + S¯ t σT + T¯ t + βˆSN σS + S¯ t N¯ t + βˆSI σS + S¯ t I¯t Gilbert, Scotti, Strasser, Vega Why Macroeconomic Announcements Move Prices 35
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