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Why do markets react badly to good news? Evidence from Fed Funds Futures

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  • Ghent, Andra

Abstract

It is well known that U.S. monetary policy is well-approximated by a Taylor rule. This suggests a reason why good macroeconomic news sometimes depresses equity returns: good news about the real side of the economy implies tighter future monetary policy. I test this hypothesis by assessing the effect of news on equity returns after controlling for changes in expectations of future monetary policy using Fed Funds Futures data. The results do not support the theory. Furthermore, the negative response of stock markets to unanticipated inflation is unchanged by controlling for changes in monetary policy expectations.

Suggested Citation

  • Ghent, Andra, 2007. "Why do markets react badly to good news? Evidence from Fed Funds Futures," MPRA Paper 1708, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1708
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Fed Funds Futures. Macroeconomic News Surprises. Taylor Rule;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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