The Reception of Public Signals in Financial Markets: What if Central Bank Communication Becomes Stale?

35 Pages Posted: 24 Aug 2009

See all articles by Michael Ehrmann

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

David Sondermann

European Central Bank (ECB)

Date Written: August 21, 2009

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

JEL Classification: E58, E43, G12, G14

Suggested Citation

Ehrmann, Michael and Sondermann, David, The Reception of Public Signals in Financial Markets: What if Central Bank Communication Becomes Stale? (August 21, 2009). ECB Working Paper No. 1077. Available at SSRN: https://ssrn.com/abstract=1440673

Michael Ehrmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

David Sondermann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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