The Effects of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market

Alessandro Beber (alessandro.beber@gmail.com) and Michael W. Brandt
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Michael W. Brandt: Fuqua School of Business, Duke University & NBER

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: We examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the U.S. Treasury market by comparing the option-implied state-price density (SPD) of bond prices shortly before and after the announcements. We find that the announcements reduce the uncertainty implicit in the second moment of the SPD regardless of the content of the news. The changes in the higher-order moments, in contrast, depend on whether the news is good or bad for economic prospects. Using a standard model for interest rates to disentangle changes in beliefs and changes in preferences, we demonstrate that our results are consistent with time-varying risk aversion in the spirit of habit formation.

Keywords: Applicationoption-implied State Price Densities; macroeconomic news; risk aversion (search for similar items in EconPapers)
JEL-codes: E44 G12 G13 G14 (search for similar items in EconPapers)
Date: 2004-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The effect of macroeconomic news on beliefs and preferences: Evidence from the options market (2006)
Working Paper: The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market (2003)
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