42 Pages Posted: 29 Aug 2003
Date Written: August 2003
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.
Suggested Citation: 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: https://ssrn.com/abstract=437483
By David Bates