The high-frequency impact of news on long-term yields and forward rates: Is it real?

By Meredith J. Beechey, Jonathan H. Wright. 2008

136 citations recorded by the source corpus.

This paper uses high-frequency intradaily data to estimate the effects of macroeconomic news announcements on yields and forward rates on nominal and index-linked bonds, and on inflation compensation. To our knowledge, it is the first study in the macro announcements literature to use intradaily real yield data, which allow us to parse the effects of news announcements on real rates and inflation compensation far more precisely than we can using daily data. Long-term nominal yields and forward rates are very sensitive to macroeconomic news announcements. We find that inflation compensation is sensitive to announcements about price indices and monetary policy. However, for news announcements about real economic activity, such as nonfarm payrolls, the vast majority of the sensitivity is concentrated in real rates. Accordingly, we conclude that most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short-term interest rates and/or real risk premia rather than changes in expected future inflation and/or inflation risk premia. This suggests that explanations for the puzzling sensitivity of long-term nominal rates need to look beyond just inflation expectations and toward models that encompass uncertainty about the long-run real rate of interest.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/621d7ebc39bffa7805a82830df52c28af819cfae

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Citations in the corpus

Did the Crisis Affect Inflation Expectations (2012, methodology): “By contrast, using daily data from early 1999 to early 2004, Beechey and Wright (2008) compared the performance of their model before and after 2004 and found evidence that inflation compensation became less sensitive to news after 2004.”
Resolution of Policy Uncertainty and Sudden Declines in Volatility (2017, unknown): “(12) The news surprises of economic indicators are treated as the control variables since they are expected to produce jumps in S&P 500 returns and other markets, e.g. Beechey and Wright (2009) and Faust and Wright (2009).”
High Frequency Identification of Monetary Non-Neutrality: The Information Effect (2018, unknown): “In earlier work, Beechey and Wright (2009) analyze the effect of unexpected movements in the Fed funds rate at the time of FOMC announcements on nominal and real 5-year and 10-year yields and the 5- to 10-year forward over the period February 2004 to June 2008.”
Testable Implications of Affine Term Structure Models (2011, background): “…premia (Duffee, 2002; Cochrane and Piazzesi, 2009), studying the effect of macroeconomic developments on the term structure (Ang and Piazzesi, 2003; Beechey and Wright, 2009; Bauer, 2009), the role of monetary policy (Rudebusch and Wu, 2008), explaining the bond-yield “conundrum” of 2004-2005…”