Expectations or Surprises: What Really Moves the U.S. Treasury Market?

51 Pages Posted: 1 Jun 2017

See all articles by Michel van der Wel

Michel van der Wel

Erasmus University Rotterdam; CREATES; ERIM; Tinbergen Institute

Deniz Erdemlioglu

IESEG School of Management, LEM-CNRS 9221, France

Date Written: May 30, 2017


The standard approach in asset pricing is to use information shocks to determine how markets react to news. We examine this paradigm empirically by decomposing high-frequency bond responses into ex-ante (expected) and ex-post (surprise) news components. Our analysis shows that the magnitude, direction and duration of reactions depend on the choice of measurement component. While bond returns barely react to news, volatility is closely linked to fundamentals. Ex-ante forecasts of investors generate significant jump (tail) clustering in the data, but we find no evidence for such effects with (ex-post) surprise measures. This suggests that considering ex-post surprises solely as proxy for shocks undermines the realized announcement impact, particularly for characterizing jump-type tail behavior in crisis periods. The news-implied reaction dispersion between expectations and shocks is sizable, related to trading volume and time-varying over the business cycle. Our findings provide relevant implications for macro-finance modeling and bond market microstructure.

Keywords: U.S. Treasury market, Volatility, Jumps, High-frequency data, Macroeconomic news announcements, Public information, Price discovery

JEL Classification: C14, C53, E44, G01, G17

Suggested Citation

van der Wel, Michel and Erdemlioglu, Deniz, Expectations or Surprises: What Really Moves the U.S. Treasury Market? (May 30, 2017). Paris December 2017 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2977254

Michel Van der Wel

Erasmus University Rotterdam ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA

Deniz Erdemlioglu (Contact Author)

IESEG School of Management, LEM-CNRS 9221, France ( email )

3 rue de la Digue
Lille, 59000

HOME PAGE: http://www.denizerdemlioglu.com

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