Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153511
Authors: 
Ehrmann, Michael
Sondermann, David
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1077
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.
Subjects: 
announcement effects
Bank of England
co-ordination of beliefs
inflation reports
Interest Rates
monetary policy
public signals
JEL: 
E58
E43
G12
G14
Document Type: 
Working Paper

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