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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 30, Issue 10, October 2006, Pages 2659–2680
This study analyses the impact of macroeconomic news announcements on the conditional volatility of bond returns. Using daily returns on the 1, 3, 5 and 10 year US Treasury bonds, we find that announcement shocks have a strong impact on the dynamics of bond market volatility. Our results provide empirical evidence that the bond market incorporates the implications of macroeconomic announcement news faster than other information. Moreover, after distinguishing between types of macroeconomic announcements, releases of the employment situation and producer price index are especially influential at the intermediate and long end of the yield curve, while monetary policy seem to affect short-term bond volatility.
The efficient market hypothesis implies that price changes in bonds reflect the arrival and processing of relevant new information. While news itself is unpredictable, in turn making changes in bond returns prices unpredictable, the release dates of many macroeconomic announcements are known. On these pre-scheduled dates, information about macroeconomic fundamentals is released. Thus two types of news exist: scheduled and non-scheduled news. In this paper we focus on the scheduled news. While firm-specific news is the main source of information in stock markets, in Treasury bond markets macroeconomic news is most important. Consequently, the effects of announcements are typically more pronounced on government backed securities than on equity (see, e.g., McQueen and Roley, 1993). Some recent studies examine the effects of macroeconomic news on Treasury bond volatility. Jones et al., 1998 and Christiansen, 2000, for example, examine the response of producers price index (PPI) and employment (EMP) releases on Treasury bond market volatility. Their results indicate significant increases in bond market volatility on announcement days. This increase does not persist, as news is immediately incorporated in the prices.1Li and Engle (1998) study the effects of announcements of the producer price index, PPI, and employment situation on the volatility of the US Treasury bond futures. They find that announcement shocks are not persistent, but bond futures volatility responds asymmetrically to announcement shocks. Piazzesi (2005) shows that the announcements of the Federal Open Market Committee (FOMC) are important for bond market volatility. In the Federal Reserve’s FOMC, which is the main policymaking body in the United States,2 policy decisions are made involving the target level of the federal funds rate. The asymmetric volatility effect, first noted by Black (1976), refers to the tendency that good and bad news in returns have a different impact on conditional volatility in stock markets. Several explanations for this phenomenon, which is especially apparent during volatile periods, are put forward. For example, Black, 1976 and Christie, 1982 argue that a drop in the value of the stock increases financial leverage, which makes the stock more risky and increases its volatility: the so-called leverage effect hypothesis. Alternatively, the asymmetric response to return shocks could simply reflect the presence of time-varying risk premia (see Pindyck, 1984). If volatility is priced, an anticipated increase in volatility would result in a higher required return, which would lead to stock price decline: the “volatility feedback” effect. Recently, Cappiello et al., 2003 and De Goeij and Marquering, 2004 report asymmetries in bond return volatility. As financial leverage is not applicable to government bonds, the leverage argument cannot explain the asymmetry in Treasury bond volatility. Unfortunately, most empirical work has studied each of the above phenomena–announcement effects and asymmetric volatility – in isolation. This is ultimately not satisfactory. First, as scheduled news differs from non-scheduled news, it is an interesting question to what extent investors anticipate to announced news. Moreover, it is interesting to compare how volatility responds towards scheduled and non-scheduled news. Second, it might be possible that (a large part of) the asymmetric volatility can be explained by announcement news, because investors can already anticipate before the news is released and over- or underreactions might be at stake. Third, as the model is considerably improved, it is likely that portfolio selection based on volatility forecast models with announcements effects outperform the traditional models. Additionally, risk management and derivative pricing can be ameliorated. In this paper, we investigate the interaction between announcements and volatility, whether scheduled news differs from non-scheduled news, and to what extent asymmetric volatility is explained by macroeconomic announcements. As asymmetry is usually associated with large shocks, which are in turn associated with macroeconomic announcements, it is natural to examine the relation between announcements and asymmetries. If asymmetries are caused by announcements shocks, asymmetric volatility becomes predictable, and investors could potentially profit from it. More specifically, we investigate the response of government bond prices to regularly scheduled announcements including the aforementioned PPI, EMP and FOMC releases. We generalize the GJR specification of Glosten et al. (1993) in such a way that macroeconomic announcements are accounted for. We use daily data from January 1982 to September 2004 on 1, 3, 5 and 10 year US Treasury bonds and two corporate bond indices. We find empirical evidence that macroeconomic pre-announcements raise the level of conditional bond market volatility to a great extent. Announcement shocks are less persistent than regular shocks, which suggests that the bond market incorporates the implications of macroeconomic announcement news faster than other information. We also obtain some compelling results after discriminating between different kinds of announcements. Macroeconomic announcements seem to be especially influential at the intermediate and long end of the yield curve, while monetary policy seem to affect especially short-term bonds. This paper differs from previous empirical studies in the following ways. First, while many studies examine the effects of announcements on volatility and the asymmetric volatility phenomenon, this paper interrelates these phenomena.3 Second, whereas all studies, as far as we know, examining announcement effects on bond volatility use few types of announcements (usually one or two), we employ a very extensive announcement dataset of sixteen types of announcements. This way, the effects of announcements are potentially measured in a better way. Flannery and Protopapadakis (2002), use seventeen announcements to examine announcements effects in the stock market volatility, and show that announcements other than the most used ones (PPI and EMP), are important factors in the stock market volatility. While Balduzzi, Elton and Green (2001) and Beber and Brandt (2005) consider many announcements in the bond market, they do not examine their effect on bond market volatility. Third, while the articles most similar in spirit to ours, Christiansen, 2000 and Li and Engle, 1998, measure the effect of news by introducing a dummy variable for announcements, we also consider the surprise element in the macroeconomic news by using survey forecasts. This might measure news better, as some announcements are simply expected and will not influence returns and volatility. Fourth, this paper is the first that considers FOMC together with PPI and EMP announcements.4 Looking at them separately, we are able in this paper to distinguish FOMC (interest rate) announcements effects and PPI and EMP from other announcements effects. This is interesting as financial press often suggest that the short-term bond volatility is more affected by Fed rate changes than long term bonds, while labor market announcements especially affects long term bonds. Fifth, whereas most studies only consider one announcement effect, we consider a pre-announcement and a news effect.5 Initially, there is a pre-announcement effect: investors know beforehand that there will be news, so a higher level of volatility on the day the news is released is anticipated. Next, there is a news (reaction) effect: once the news is released, investors process the newly received information (not previously incorporated into asset prices) which might raise the market volatility next day, as investors might disagree on the news consequences of the new information on asset prices (see, e.g., Varian, 1989 and Harris and Raviv, 1993). Separating these two effects, which to our knowledge has not been done before, might result in interesting new findings. The remainder of this paper is organized as follows. Section 2 provides a brief description of the relation between news arrival and market volatility, and presents the empirical framework. We also discuss the way the model deals with pre-announcements effects and feedback effects after the announcement is made. Section 3 describes the data used in the analysis. In Section 4, we discuss the empirical results. Finally, Section 5 concludes.
نتیجه گیری انگلیسی
This paper investigates the interaction between announcements and volatility in bond markets, whether announcement news differ from non-announcement news, and to what extent asymmetric volatility is explained by macroeconomic announcements. To this end, we accommodate the model of Glosten et al. (1993) in such a way that macroeconomic announcements and their surprises in Treasury bond markets are accounted for. We use daily returns on the 1, 3, 5 and 10 year Treasury bond, for the period January 1982–September 2004. The most important reason that macroeconomic announcement shocks have a different impact on volatility is because they are regularly scheduled, such that the timing of these announcements is known in advance. While Li and Engle, 1998 and Christiansen, 2000 do not include pre-announcement effect in their models, we find that it is important. The anticipated conditional variances and covariances are much higher on macroeconomic announcement days. FOMC announcements are especially important for short-term bonds, while for long term bonds PPI and EMP are the most important announcements. The impact of the remaining announcements are of a lesser order. The results show that volatility on announcement days does not persist for the Treasury and corporate bonds, consistent with the immediate incorporation of information into prices. This confirms the findings of Li and Engle, 1998 and Christiansen, 2000. Negative announcement shocks typically have a greater impact on the subsequent volatility than positive announcement shocks. After introducing macroeconomic announcements into the model, none of the asymmetric volatility parameter estimates is individually significant anymore. We find similar results for high- and medium-grade corporate bonds, and for the covariances between bond returns. While the asymmetric volatility may disappear because of the introduction of announcements effects, this result might be related to the power of the tests. The results of this study give raise to interesting future research topics. The use of options data to study the volatility impact of macroeconomic news could increase the power of the tests. Beber and Brandt (2005) for instance show that the cross-section of option prices embed the dynamics of volatility. As some industries depend more on macroeconomic factors than others, it is interesting to investigate industry stock portfolios. Moreover, as suggested by McQueen and Roley, 1993 and Veronesi, 1999 it is likely that the impact of macroeconomic news releases on bond returns depends on the state of the economy, i.e. whether we are in a recession or an expansion. Further research may elaborate on these issues in more detail.