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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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