What Information Drives Asset Prices?
Abstract: The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Constantinides received financial support from the Center for Research in Security Prices, the University of Chicago, as trustee/director of the DFA group of funds and SW7 Holdings and as member of the advisory board of FTSE Russell and the Cook County Illinois Investment Policy Committee. NBER working papers are circulated for discussion and comment purposes. They have not … Show more
Search citation statements
Paper Sections
Citation Types
Publication Types
Relationship
Authors
Journals
Cited by 3 publications
References 27 publications
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings. Terms of use: Documents in EconStor mayJEL-Codes: E310, E430, E440, E520, E580, G120.Keywords: return predictability, policy speeches, expected returns, macro news. Andreas Neuhierl I IntroductionThe FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase.Janet L. Yellen (2015) ...policy deliberations happen on a rather continuous basis. Kevin Warsh (2015)The main objectives of the Federal Reserve (Fed) under its dual mandate are price stability and maximum employment. The Fed funds rate is the Fed's main conventional policy tool to achieve those goals. But whereas real consumption, investment, and GDP only respond with a lag to changes in the target rate, asset prices respond directly and immediately.Yellen's quote, however, highlights that asset prices might react not only to changes in short-term interest rates, but also to changes in expectations about the speed of monetary policy loosening and tightening. Previous governor Warsh, instead, stresses that monetary policy decisions happen continuously rather than only on eight scheduled Federal Open Market Committee (FOMC) meetings that are the focus of a large event study literature.We use weekly changes in the one-month and three-month federal funds futuresimplied rates to test for the effect of changes in the future path of monetary policy on asset prices throughout the year.1 Specifically, we argue that changes in one-month futures, f f t,1 , affect all future target rates, and we can interpret it as a level factor.Changes in the three-month futures, f f t,3 ...
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings. Terms of use: Documents in EconStor mayJEL-Codes: E310, E430, E440, E520, E580, G120.Keywords: return predictability, policy speeches, expected returns, macro news. Andreas Neuhierl I IntroductionThe FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase.Janet L. Yellen (2015) ...policy deliberations happen on a rather continuous basis. Kevin Warsh (2015)The main objectives of the Federal Reserve (Fed) under its dual mandate are price stability and maximum employment. The Fed funds rate is the Fed's main conventional policy tool to achieve those goals. But whereas real consumption, investment, and GDP only respond with a lag to changes in the target rate, asset prices respond directly and immediately.Yellen's quote, however, highlights that asset prices might react not only to changes in short-term interest rates, but also to changes in expectations about the speed of monetary policy loosening and tightening. Previous governor Warsh, instead, stresses that monetary policy decisions happen continuously rather than only on eight scheduled Federal Open Market Committee (FOMC) meetings that are the focus of a large event study literature.We use weekly changes in the one-month and three-month federal funds futuresimplied rates to test for the effect of changes in the future path of monetary policy on asset prices throughout the year.1 Specifically, we argue that changes in one-month futures, f f t,1 , affect all future target rates, and we can interpret it as a level factor.Changes in the three-month futures, f f t,3 ...
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings. Terms of use: Documents in EconStor mayJEL-Codes: E310, E430, E440, E520, E580, G120.Keywords: return predictability, policy speeches, expected returns, macro news. Andreas Neuhierl I IntroductionThe FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase.Janet L. Yellen (2015) ...policy deliberations happen on a rather continuous basis. Kevin Warsh (2015)The main objectives of the Federal Reserve (Fed) under its dual mandate are price stability and maximum employment. The Fed funds rate is the Fed's main conventional policy tool to achieve those goals. But whereas real consumption, investment, and GDP only respond with a lag to changes in the target rate, asset prices respond directly and immediately.Yellen's quote, however, highlights that asset prices might react not only to changes in short-term interest rates, but also to changes in expectations about the speed of monetary policy loosening and tightening. Previous governor Warsh, instead, stresses that monetary policy decisions happen continuously rather than only on eight scheduled Federal Open Market Committee (FOMC) meetings that are the focus of a large event study literature.We use weekly changes in the one-month and three-month federal funds futuresimplied rates to test for the effect of changes in the future path of monetary policy on asset prices throughout the year.1 Specifically, we argue that changes in one-month futures, f f t,1 , affect all future target rates, and we can interpret it as a level factor.Changes in the three-month futures, f f t,3 ...
We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings. Andreas Neuhierl I IntroductionThe FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase.Janet L. Yellen (2015) ...policy deliberations happen on a rather continuous basis. Kevin Warsh (2015)The main objectives of the Federal Reserve (Fed) under its dual mandate are price stability and maximum employment. The Fed funds rate is the Fed's main conventional policy tool to achieve those goals. But whereas real consumption, investment, and GDP only respond with a lag to changes in the target rate, asset prices respond directly and immediately.Yellen's quote, however, highlights that asset prices might react not only to changes in short-term interest rates, but also to changes in expectations about the speed of monetary policy loosening and tightening. Previous governor Warsh, instead, stresses that monetary policy decisions happen continuously rather than only on eight scheduled Federal Open Market Committee (FOMC) meetings that are the focus of a large event study literature.We use weekly changes in the one-month and three-month federal funds futuresimplied rates to test for the effect of changes in the future path of monetary policy on asset prices throughout the year.1 Specifically, we argue that changes in one-month futures, f f t,1 , affect all future target rates, and we can interpret it as a level factor.Changes in the three-month futures, f f t,3 , instead also contain information about the future path of monetary policy. We regress changes in the three-month futures-implied rate on the changes in the one-month futures-implied rate to get a purified measure of changes in expectations of the path of future monetary policy. We refer to the residual 1 We focus on the one-and three-month futures because longer-term futures either did not exist at the beginning of our sample (1994) or were not heavily traded.2 of this regression as the slope factor. The regression coefficient is close to 1; at a basic level, therefore, we can think of slope as a difference in differences: slope = ∆(f f t+1,3 − f f t,3 ) − ∆(f f t+1,1 − f f t,1 ). A positive slope factor reflects...
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
Contact Info
customersupport@researchsolutions.com
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Product
Resources
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.
