Economic news leads to adjustments in the prices of financial assets, from stocks and bonds to foreign exchange rates and interest rate futures. Basic economic thinking suggests that a surprise in one indicator should elicit a similar surprise in the prices of other indicators, with shifts in bond yields and exchange rates typically generating the strongest responses and stock prices the weakest. However, research has generally found that only a few economic announcements generate asset price responses that are economically significant and measurably persistent through the rest of the day.
The main reason for this is that survey-based measures of market expectations may be plagued by measurement errors that make the resulting estimate of “measured news” different from true news. Moreover, these errors are compounded by the fact that surveys of forecasts are often conducted well in advance of actual data releases, and so the resulting measured news has been swamped by information that accumulated between the survey and the release date.
In this article, we address these issues by estimating the instantaneous effects of economic news on asset prices using a new approach that cleans the measured news of the error and the noise that accumulates between survey time and data release. Our estimates of the immediate impact of a news event agree in sign with those produced by standard OLS approaches, but they are considerably larger. We present evidence that this is mainly due to the Rigobon-Sack methodology’s ability to correct for the distortions in measured news.