Basic economic thinking suggests that the release of economic news should have some effect on the prices of financial assets. For example, news of unexpectedly high inflation will probably lead to higher bond yields as investors anticipate a tightening of monetary policy by the central bank. In contrast, news of unexpectedly strong growth is expected to drive stock prices higher, thereby encouraging savers to switch from bonds into stocks.
However, actual evidence of these relationships is scarce. In this paper, we explore how different types of economic news impact asset prices in the stock, bond, and foreign exchange markets. We find that only a few announcements—nonfarm payrolls, GDP advance releases, and a private sector manufacturing report—give rise to asset price responses that are economically significant and measurably persistent. The responses are strongest for bond yields and weakest for stock prices.
We also find that survey data on market expectations may contain errors, due to a lag between the survey and the release of the indicator, or due to accumulated information about the indicator in the intervening period. We address these issues by using a new estimation procedure that filters out measurement error and the accumulated information about the indicator. This approach produces estimates of asset price responses that are comparable in sign and magnitude to those produced by standard OLS methods.
The current upsurge in Chinese equities seems to reflect investor optimism about China’s technological prowess. It is also likely that relatively easy monetary policy in China has encouraged saving to shift out of fixed income products and into equities.