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http://ssrn.com/abstract=437483
 
 

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


Alessandro Beber


Cass Business School; Centre for Economic Policy Research (CEPR)

Michael W. Brandt


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

August 2003

NBER Working Paper No. w9914

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.

Number of Pages in PDF File: 42

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Date posted: August 29, 2003  

Suggested Citation

Beber, Alessandro and Brandt, Michael W., The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market (August 2003). NBER Working Paper No. w9914. Available at SSRN: http://ssrn.com/abstract=437483

Contact Information

Alessandro Beber
Cass Business School ( email )
London, EC2Y 8HB
Great Britain
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Michael W. Brandt (Contact Author)
Duke University - Fuqua School of Business ( email )
1 Towerview Drive
Durham, NC 27708-0120
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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