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

Ghent, Andra (2007): Why do markets react badly to good news? Evidence from Fed Funds Futures. Unpublished.

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.

• Item Type: MPRA Paper
• Institution: University of California, San Diego
• Language: English
• Keywords: Fed Funds Futures. Macroeconomic News Surprises. Taylor Rule
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects); E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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