Asset Price Reactions to News at the Zero Lower Bound

Abstract

This paper analyzes the reaction of interest rates and the stock market to macroeconomic news announcements (MNAs) at the zero lower bound (ZLB). I start by using a shadow rate term structure model to formulate three predictions for the sensitivity of interest rates to MNAs. First, “better”-than-expected macroeconomic data increases interest rates. Second, as the expected duration of the ZLB increases, whether because economic conditions are worse or because monetary policy changes, interest rates become less sensitive to macroeconomic data. Third, this attenuation in the sensitivity of interest rates is largest for intermediate-maturity rates. I verify these predictions by using a broad sample of MNAs and high-frequency intraday futures data on interest rates. Turning to stocks, I show that the stock market's reaction to MNAs can be decomposed into an interest rate news term that is directly related to interest rates' reaction to MNAs and a cash flow plus risk premium news term. Using the same sample of MNAs and high-frequency intraday futures data on the stock market, I empirically estimate the stock market's sensitivity to macroeconomic data as well as that of the constituent news terms. Based on the interest rate news term alone, the expected duration of the ZLB should increase the sensitivity of stocks to macroeconomic news. The data furthermore suggests that the expected duration of the ZLB decreases the magnitude of the cash flow plus risk premium news term.