The reception of public signals in financial markets – what if central bank communication becomes stale?

Michael Ehrmann and David Sondermann

No 66, NBP Working Papers from Narodowy Bank Polski

Abstract: How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to macroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses.

Keywords: public signals; inflation reports; monetary policy; interest rates; announcement effects; co-ordination of beliefs; Bank of England (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 G14 (search for similar items in EconPapers)
Pages: 30
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-cta, nep-fmk, nep-mac and nep-mon
Note: The paper was presented at the National Bank of Poland’s conference ”Publishing Central Bank Forecast in Theory and Practice” held on 5–6 November 2009 in Warsaw.
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Citations: View citations in EconPapers (8)

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Working Paper: The reception of public signals in financial markets - what if central bank communication becomes stale? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:66

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