Surprise Changes Research Articles

How to construct monthly VAR proxies based on daily surprises in futures markets

It is common in applied work to estimate responses of macroeconomic aggregates to news shocks derived from surprise changes in daily futures prices around the date of policy announcements. This requires mapping the daily surprises into a monthly shock that may be used as an external instrument in a monthly VAR model or local projection. The standard approach has been to sum these daily surprises over the course of a given month when constructing the monthly proxy variable, ignoring the accounting relationship between daily and average monthly price data. In this paper, I discuss an alternative approach to constructing monthly proxies from daily surprises that takes account of this link and revisit the question of how to use OPEC announcements to identify news shocks in VAR models of the global oil market. The proposed approach calls into question the interpretation of the identified shock as oil supply news and implies quantitatively and qualitatively different estimates of the macroeconomic impact of OPEC announcements.

How does the fed affect corporate credit costs? Default risk, creditor segmentation and the post-FOMC drift

Surprise changes in monetary policy rates have a causal impact on credit risk measures, which display a significant post-FOMC drift. I employ a tight identification strategy to decompose the influence of firm-specific and creditor-specific factors across horizons. Firms with narrower income gaps and lower Tobin’s Q ratios exhibit heightened sensitivity at both short and long horizons. Bonds predominantly held by bond funds demonstrate only temporarily more sensitivity, indicating that credit market segmentation fails to account for the observed drift. Aggregate broker dealer capital scarcity is linked to an amplified response in the drift component. A large portion of the drift remains unexplained, revealing the limitations of cross-sectional characteristics in explaining the transmission mechanism.

Vintage article: the effect of monetary policy shocks in the UK: an external instruments approach

AbstractThis paper uses vector autoregression model analysis to identify monetary policy shocks on UK data using surprise changes in the policy rate as external instruments and imposing block exogeneity restrictions on domestic variables to estimate parameters from the viewpoint of the domestic economy. The results show large and persistent effects of monetary policy shocks on the domestic economy and point to the critical role of exchange rates and term premia. The analysis resolves important empirical puzzles of traditional recursive identification methods.

House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data

Existing literature documents that house prices respond to monetary policy surprises with a significant delay, taking years to reach their peak response. We present new evidence of a much faster response. We exploit information contained in listings for the residential properties for sale in the United States between 2001 and 2019 from the CoreLogic Multiple Listing Service Dataset. Using high-frequency measures of monetary policy shocks, we document that a one standard-deviation contractionary monetary policy surprise lowers housing list prices by 0.2–0.3 percent within two weeks—a magnitude on par with the effect on stock prices. House prices respond stronger to the surprises to future rates as compared to the surprise changes in the federal funds rate. Sale prices are mostly pre-determined by list prices and do not independently respond to monetary policy surprises.

The growing impact of US monetary policy on emerging financial markets: Evidence from India

Much research has been devoted to studying the international spillover effects of US monetary policy. However, a lot of the focus has been on the recent unconventional monetary policies undertaken by the Federal Reserve. Combining high frequency financial market data with a time-varying parameter approach we show that US monetary policy decisions have had significant effects on the Indian stock markets well before the use of unconventional policy tools and that these effects have gotten stronger over time. In addition to the conventional channel of surprise changes in the policy rate, we find that US monetary shocks are also transmitted through an uncertainty channel, which is especially important for announcements about large scale asset purchases (quantitative easing). Using firm level stock prices, we also show that the higher sensitivity of the aggregate response is uniform across the stock market and is not driven by the increased exposure of any specific industry to US monetary policy. Instead, our results suggest that it is driven by the portfolio decisions of foreign institutional investors, the exchange rate becoming more sensitive to US monetary policy and the global financial cycle working through volatility and risk aversion.

Effects of Monetary Policy Communication in Emerging Market Economies: Evidence from Malaysia

By conducting a high-frequency event study similar to Gurkaynak et al. (2005), we find that two factors are needed to adequately capture the effects of monetary policy announcements for a non-inflation targeting emerging market economy, Malaysia. These factors are the surprise changes in the policy rate (Overnight Policy Rate, OPR) and the information about the future path of monetary policy. We find that the path factor has a strong influence on long-term government bond yields, corporate bond yields and spreads. Our findings are indicative of the view that monetary policy communication is mostly about revealing information pertaining to the central bank’s assessment of the economic outlook, as opposed to an unconditional binding commitment to follow a specific policy path.

Measuring the effects of federal reserve forward guidance and asset purchases on financial markets

The methods of Gürkaynak et al. (2005a) are extended to separately identify surprise changes in the federal funds rate, forward guidance, and large-scale asset purchases (LSAPs) for each FOMC announcement from July 1991 to June 2019. Forward guidance and LSAPs had substantial and highly statistically significant effects on Treasury yields, corporate bond yields, stock prices, and exchange rates, comparable in magnitude to the effects of the federal funds rate in normal times. These effects were all very persistent, with the exception of the very large and perhaps special March 2009 “QE1” announcement for LSAPs.

The impact of non-banking financial institutions on monetary policy transmission in Euro area

The structure of financial intermediation has been subject to significant changes in last decades. The share of banks in the financial system is declining while non-banks are increasing, and this trend is especially evident in Euro area. The changing structure of financial intermediation has been subject of increasing attention of monetary authorities, as it may generate significant changes in the way monetary policy is transmitted to the economy. The goal of this research is to study the impact of non-banking financial institutions on monetary policy transmission in Euro area. This analysis applies a Bayesian vector autoregression model and identifies monetary policy shock in Euro area using three identification strategies—recursive identification, sign restriction and external instruments in the form of surprise changes in market rates in a short time-frame around ECB monetary policy meetings and announcements. The results show that non-banking financial institutions do not dampen transmission of monetary policy in Euro area—in response to monetary contraction they contract their balance sheets for the most part, while banks have more dampening effect or contract their assets less.

The Impact of Federal Reserve's Conventional and Unconventional Monetary Policies on Equity Prices

I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchases, along with the effects of interest rate changes under conventional policy, on the U.S. equity market, and assess the reasons for stock price responses. Although the overall stock market respond meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make minor contributions the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across sectors.

Discussion of “Accounting quality and the transmission of monetary policy”

Armstrong, Glaeser and Kepler (2019) examine whether accounting quality affects the sensitivity of a firm's stock returns to monetary policy news. The authors document that firms with lower accounting quality experience more pronounced responses to surprise changes in the target Federal funds rate, consistent with proposed balance-sheet channel of policy transmission. We first discuss how this paper fits with prior literature on the role of accounting quality and firm investment and with recent work examining information frictions and policy transmission. We then question the intuition behind the paper's symmetric prediction. In addition, we highlight potential measurement issues related to returns and accounting quality. Lastly, we consider the key takeaways of the paper and provide suggestions for areas of future research.

Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk

Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position

The Growing Impact of US Monetary Policy on Emerging Financial Markets: Evidence from India

Much research has been devoted to studying the international spillover effects of US monetary policy. However, a lot of the focus has been on the recent unconventional monetary policies undertaken by the Federal Reserve. Combining high frequency financial market data with a time-varying parameter approach we show that US monetary policy decisions have had significant effects on the Indian stock markets well before the use of unconventional policy tools and that these effects have gotten stronger over time. In addition to the conventional channel of surprise changes in the policy rate, we find that US monetary shocks are also transmitted through an uncertainty channel, which is especially important for announcements about large scale asset purchases (quantitative easing). Using firm level stock prices, we also show that the higher sensitivity of the aggregate response is uniform across the stock market and is not driven by the increased exposure of any specific industry to US monetary policy. Instead, our results suggest that it is driven by the portfolio decisions of foreign institutional investors and the exchange rate becoming more sensitive to US monetary policy.

The informational role of options markets: Evidence from FOMC announcements

Abstract This paper examines the informational role of equity options trading around Federal Open Market Committee (FOMC) announcements. We find that information contained in option trades prior to FOMC rate change announcements, measured as implied volatility spread, predicts bank stock returns to a greater degree than does volatility spread prior to non-meeting days. We examine U.S. banks due to their interest rate sensitivity; however, we also show that return predictability around rate changes is reliably stronger in all firms, across all industries that are more interest rate sensitive. We find that return predictability is primarily driven by surprise changes in interest rates that occur during meetings with high degrees of information asymmetry. Finally, we document that volatility spread impounds information about FOMC meetings before that information is reflected in stock prices; this effect is significantly greater during surprise events, suggesting that the options market is an important source of informed trading.

THE DETERMINANTS OF A SIMULTANEOUS CRASH IN GOLD AND STOCK MARKETS: AN ORDERED LOGIT APPROACH

In this study, we identify the determinants of a simultaneous crash in gold and stock markets by employing an ordered logit model. We find that a default spread, among the various financial risk indicators, is a valid determinant and that changes in investors’ beliefs, their uncertainties, and surprise changes in these uncertainties about gold and stock markets contain useful information for explaining the occurrence of a simultaneous crash in the two markets. Further, we recognize that the effect of some covariates on crash probability is state-dependent. In addition to these empirical results, a notable finding is that the occurrence of a crash in one market on a previous day does not raise the probability of the occurrence of a crash in another market the next day, implying that a joint crash occurs abruptly and not in a chain reaction. This finding reveals that diversification to gold is still beneficial to investors.

Do Foreign Exchange Market Responses to Interest Rate Announcements Evolve over Time? Evidence from Poland

Evidence from the international markets shows that the responsiveness of financial instruments’ prices to monetary policy announcements tends to weaken in a low level interest rate environment. The objective of our study is to verify if a similar effect existed in Poland when interest rate decreased from high to low levels over time. The focus of our paper is the currency market. We use GARCH class models with dummy variables as our main methodological tool. In the case of interest rate announcements, we distinguish between the nominal changes in interest rate and surprise changes. The surprise component is extracted by comparing the actual NBP announcements regarding the change of the interest rate with market expectations captured by the consensus forecasts from Reuters surveys of financial market participants in Poland. The results from our study demonstrate that in a lower interest rate environment, the foreign exchange market in Poland has become less responsive to interest rate decisions. We also find evidence that the reactions of foreign exchange rate returns tend to be stronger in case of interest rate changing upwards rather than downwards. Our results about the evolving nature of reactions of the foreign exchange market in Poland in both high and low interest rate environments may provide helpful information for policymakers about the impact of their policy decisions.

Monetary Policy Communication Shocks and the Macroeconomy

Using federal funds futures data, we show the importance of surprise as a component of monetary policy for U.S. macro variables, both before and after 2008. While GA¼rkaynak et al. (2005) stress the importance of monetary policy for asset prices, much of the subsequent VAR literature attributes all effects of monetary policy on macro variables to surprise changes in the policy rate. Instead, we distinguish between monetary policy action and communication (surprise announcements about future policy moves), both orthogonal to internal Fed information. To do so,we use a decomposition of futures price movements exploiting variation across contract maturities. In a monthly sample from 1994 to 2008, our results indicate that it is mainly shocks - as opposed to actual rate-change surprises - that affect production in the ways traditionally associated with monetary policy shocks.We also use Eurodollar futures to cover the zero-lower bound period and find strong effects on inflation for long-horizon shocks.

The response of oil market to US monetary policy surprises

The impact of monetary policy surprises from the USA on volatility of oil returns are examined over a period of instability from January 5, 2004 through December 31, 2008. Following Kuttner (2001), I use the change in the one-day current-month futures rate at a given date to measure monetary policy news. Using EGARCH model, my results suggest that these shocks are an important driver of the oil market. I find that the volatility reacts in a statistically significant and economically relevant fashion to surprise changes in the target rate. The estimated effect on the volatility is positive. Moreover, I show that the daily changes in federal funds futures rates don't have any role in the dynamics of oil volatility during the sample period. Finally, I also show that all model parameters to be highly significant with higher volatility persistence.

The response of oil market to US monetary policy surprises

The impact of monetary policy surprises from the USA on volatility of oil returns are examined over a period of instability from January 5, 2004 through December 31, 2008. Following Kuttner (2001), I use the change in the one-day current-month futures rate at a given date to measure monetary policy news. Using EGARCH model, my results suggest that these shocks are an important driver of the oil market. I find that the volatility reacts in a statistically significant and economically relevant fashion to surprise changes in the target rate. The estimated effect on the volatility is positive. Moreover, I show that the daily changes in federal funds futures rates don't have any role in the dynamics of oil volatility during the sample period. Finally, I also show that all model parameters to be highly significant with higher volatility persistence.

ECB Monetary Policy Transmission During Normal and Negative Interest Rate Periods

We analyze monetary policy transmission in the euro area from 2009--2016, including changes during the negative interest rate policy (NIRP) period as of June 2014. We identify three dimensions of ECB monetary policy related to surprise changes in (i) the target rate, (ii) the expected future path of the target rate (path factor), and (iii) longer-term interest rates (term factor). We find that surprise shocks about the target rate and the future path of the target rate have strong effects on interbank lending rates and government bond yields. Moreover, expansionary monetary policy surprises related to the term factor decrease government bond yields across all maturities and have strongest effects on medium- and long-term maturities. Prices of riskier assets, such as longer-term assets, sovereign bonds from crisis countries, or equities, increase significantly more in response to expansionary monetary policy shocks during the NIRP period. Moreover, during the NIRP period, expansionary target rate shocks further decrease loan interest rates and strongly increase the origination of new bank loans to businesses and households, particularly for loans with longer maturities.

The Characteristics of Contemporary Monument Buildings in The City Al-Najaf Holly City- Case Study

The research deals with monument buildings in the city, as important urban landmarks of interest to many researchers in different fields of knowledge. These buildings take multiple forms and characteristics from one place to another, especially in the contemporary period witnessed radical and surprise changes at the level of form, function, meanings and local connectivity. Etc. In addition, the wide gap between what these characteristics in the international contexts and the Arabic cities. This led the research to review previous studies and literatures in different research directions. The research based on main hypothesis “the contextual and architectural properties of local contemporary monument buildings consist from a variety of effective vocabulary and variables that achieve monumental characteristic ".A group of buildings in Al-Najaf within specific criteria was elected to prove the hypothesis, using analysis method for the vocabulary concluded from theoretical framework. The research has reached to prove the monumental characteristic of these buildings within its context for the conformity with the basic vocabulary of contemporary monument buildings architectural properties plus the contextual characteristics whether match was fully or partially. The search revealed a similarity in the contextual characteristics of these buildings between local and international city. While a high contrast in architectural characteristics appeared, because of differences in intellectual, social and economic level, which influence the receptivity of influencing contemporary globalization cultures directly on these properties.