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The asymmetric impact of macroeconomic announcements on U.S. Government bond rate level and volatility

Tuysuz, Sukriye (2007): The asymmetric impact of macroeconomic announcements on U.S. Government bond rate level and volatility.

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Abstract

This paper investigates the impact of macroeconomic and monetary news on U.S. Government bond rate level and volatility. Specifically, it checks if these news affect differently interest rate level and volatility during "stable" and "unstable" periods. "Unstable" periods correspond to the periods marked by a great uncertainty on Government bond market. To do this, first we distinguish the "stable" and "unstable" periods by estimating interest rate dynamics with a markov swithing ARCH process, proposed by Hamilton and Susmel (1994). The results of this first estimation suggest that U.S. interest rate volatility is higher during periods of financial crises, war time periods and during periods marked by economic or policy instability. We use these results to evaluate interest rate mean and volatility response to U.S. macroeconomic and monetary news with an EGARCH model, proposed by Nelson (1991). The results show that news announcements do not have important impact on interest rate volatility during "stable" periods. In contrast, they strongly affect market volatility during "unstable" periods. Finally, we check whether positive and negative news announcements influence differently bond rate volatility during "unstable" periods. The results suggest that negative news have important effects on the bond market volatility compared to the effects of positive news.

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