Why do markets react badly to good news? Evidence from Fed Funds Futures

Andra Ghent

MPRA Paper from University Library of Munich, Germany

Abstract: It is well known that U.S. monetary policy is well-approximated by a Taylor rule. This suggests a reason why good macroeconomic news sometimes depresses equity returns: good news about the real side of the economy implies tighter future monetary policy. I test this hypothesis by assessing the effect of news on equity returns after controlling for changes in expectations of future monetary policy using Fed Funds Futures data. The results do not support the theory. Furthermore, the negative response of stock markets to unanticipated inflation is unchanged by controlling for changes in monetary policy expectations.

Keywords: Fed; Funds; Futures.; Macroeconomic; News; Surprises.; Taylor; Rule (search for similar items in EconPapers)
JEL-codes: E44 E52 G14 (search for similar items in EconPapers)
Date: 2007-02-07
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1708

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