For many of us, economic news is part of the daily diet. We read about unemployment numbers, GDP and interest rates and are shaped by the ups and downs of stock prices. But what exactly is the impact of these stories?
Economic indicators are often accompanied by announcements that can have major consequences for financial markets. A small unexpected shift in a single indicator may rock some asset prices, while others respond to the same news with little or no reaction at all. For example, a surprise increase in a domestic or foreign inflation rate typically prompts an increase in bond yields. Similarly, a surprise decrease in the unemployment rate generally triggers a decline in stock prices.
These patterns are intuitive and consistent with basic economic thinking. However, evaluating the impact of economic news is complicated by several factors. For one, survey data on expected future indicators contain a lot of information that has already been incorporated into market expectations by the time the actual data is released. This “measured news” can cause the estimated asset price response to be overly low.
To overcome this problem, we use a simple approach developed by Rigobon and Sack (2008, 2010) to measure the true impact of the news on asset prices. Their method yields estimates of asset responses that agree in sign with those produced by the standard OLS approach, but are typically larger. The Rigobon-Sack estimated responses are also free of the measurement error and informa- tional noise that accumulates between the survey and the release.