Economic news can send shocks through the financial system. For example, it is widely believed that shocks to economic news, especially unexpectedly strong or weak economic growth or inflation, can lead to higher interest rates on risky assets such as bonds and stock prices. This is because investors will be concerned about a stronger economy and higher inflation, possibly leading to the need for the central bank to pursue tighter monetary policy than expected.
However, research has been mixed on whether these effects are real. Some studies have found that economic news indeed does affect asset prices, while others have found no such effects or, at best, only small and erratic ones. A key problem is that many of these studies use survey data to estimate asset price responses, and these surveys have a lag between the survey date and the release of the indicator in question-a lag that can give rise to measurement error.
The authors explore the implications of these and other problems for the analysis of asset price reactions to economic news. They find that only a few economic announcements-the nonfarm payroll numbers, the GDP advance release, and a private sector manufacturing report-generate price responses that are economically significant and measurably persistent. The strongest effects are on bond yields, while the weakest effects are on stock prices.
They also develop a methodology for measuring the impact of economic news that corrects for the measurement errors incurred when using survey data to measure asset prices. Their methodology yields estimated asset price responses that are similar in sign to those of the standard approach, but they are typically larger.