Surprise Changes Research Articles

""Holier than Thou? A Natural Field Experiment on Social Information in Charitable Giving"""

Previous laboratory and field experiments suggest increased levels of generosity when donor identities are revealed. We add to this by studying a unique natural field experiment. We explore a panel of religious donors tracking 1,597 households over 335 weeks from 1994-2000 in Zagreb, Croatia. Donations were solicited at each Sunday mass for a fundraising campaign to construct a new church. Every Sunday, the priest announced donations, names, and addresses of donors, with surprise changes in the presentation of this social information. Individual donations were publicly announced for the first 117 weeks, posted on a publicly visible board for the next 106 weeks, and finally announced in cumulative total for the final 112 weeks. We exploit this unique setup to present evidence about the role of publicity and complementarity in preferences for altruism. We find strong evidence that social information affects giving. Individuals are more inclined to donate when donation is publicized more loudly, when it is associated with positive information about the individual's donation history, and simultaneously with other individuals in the same reference group. Our results are well explained by a model of individual preferences over warm glow and social comparisons.

The Impact of Monetary Policy Surprises on Energy Prices

This paper examines the effect of monetary policy surprises on energy prices at intra-day, daily, and monthly frequencies. We measure monetary policy shocks using changes in interest rate futures prices that capture unexpected changes in the federal funds target rate. We find a significant response of energy prices to surprise changes in the federal funds target rate in an intra-day window, immediately following the monetary announcement. However, the accumulated responses of energy prices to monetary shocks over a period of several days after the announcement are statistically insignificant. We also use federal funds futures data to identify the contemporaneous impact of monetary policy shocks on oil prices in a monthly structural VAR setup. We find no statistically significant effect of federal funds rate shocks on oil prices. The VAR estimates support the assumption of no contemporaneous feedback from monetary policy to energy prices.

The Impact of Monetary Policy Surprises on Energy Prices

AbstractThis paper examines the effect of monetary policy surprises on energy prices at intraday, daily, and monthly frequencies. We measure monetary policy shocks using changes in interest rate futures prices that capture unexpected changes in the fed funds target rate. We find a significant response of energy prices to surprise changes in the fed funds target rate in an intraday window immediately following the monetary announcement. However, the accumulated responses of energy prices to monetary shocks over a period of several days after the announcement are statistically insignificant. We also use fed funds futures data to identify the contemporaneous impact of monetary policy shocks on oil prices in a monthly structural vector autoregressive (VAR) setup. We find no statistically significant effect of federal funds rate shocks on oil prices. The VAR estimates support the assumption of no contemporaneous feedback from monetary policy to energy prices. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 35:87–103, 2015

The effects of Federal funds rate surprises on S&P 500 volatility and volatility risk premium

Abstract In this paper, we examine the effects of expected and surprise components in Federal funds target rate changes on realized and implied volatility. We find that surprise changes in the target rate significantly increase volatility. Consistent with the efficient market hypothesis, our analysis suggests that the expected component of a target rate change as well as the target rate change itself, do not significantly affect volatility. We also show that larger than expected decreases in the Federal funds target rate tend to lower the volatility risk premium.

Budget deficit and long-term interest rates in South Africa

This paper investigated the extent of the effects of the systematic and surprise changes in budget deficits on the long-term interest rate in South Africa. Use was made of the identified cointegrating vector autoregressive (VAR) techniques whereby cointegrating vectors were identified based on the Fisher effect theory and the expectation hypothesis of the term structure to assess the effect of systematic changes in budget deficit on the long-term interest rate. Moreover, the generalised impulse response functions obtained from the cointegrating VAR were used to assess the effect of the surprise change in budget deficit on the long-term interest rate. The results of the paper showed a positive relationship between the budget deficits and long-term interest rate under different assumptions of price expectations by economic agents.

Pricing Tips and Treasuries with Linear Regressions

We present an affine term structure model for the joint pricing of real and nominal bond yields that accounts for illiquidity. Using the model to adjust breakevens for inflation and liquidity risk substantially improves inflation forecasts. Our estimates imply that the Federal Reserve’s large-scale asset purchases lowered Treasury yields primarily by reducing real term premia. Real term premia also account for the positive response of long-term real forward rates to surprise changes in the federal funds target. Applying our model to U.K. data, we find that the inflation risk premium dropped significantly when the Bank of England formally adopted an inflation target.

Sedimentation and sustainability of western American reservoirs

Reservoirs are sustainable only as long as they offer sufficient water storage space to achieve their design objectives. Life expectancy related to sedimentation is a measure of reservoir sustainability. We used data from the Army Corps of Engineers, U.S. Bureau of Reclamation, and U.S. Geological Survey (Reservoir Sedimentation Survey Information System II (RESIS II)) to explore the sustainability of American reservoirs. Sustainability varied by region, with the longest life expectancies in New England and the Tennessee Valley and the shortest in the interior west. In the Missouri and Colorado River basins, sedimentation and rates of loss of reservoir storage capacity were highly variable in time and space. In the Missouri River Basin, the larger reservoirs had the longest life expectancies, with some exceeding 1000 years, while smaller reservoirs in the basin had the shortest life expectancies. In the Colorado River Basin at the site of Glen Canyon Dam, sediment inflow varied with time, declining by half beginning in 1942 because of hydroclimate and upstream geomorphic changes. Because of these changes, the estimated life expectancy of Lake Powell increased from 300 to 700 years. Future surprise changes in sedimentation delivery and reservoir filling area are expected. Even though large western reservoirs were built within a limited period, their demise will not be synchronous because of varying sedimentation rates. Popular literature has incorrectly emphasized the possibility of rapid, synchronous loss of reservoir storage capacity and underestimated the sustainability of the water control infrastructure.

U.S. Monetary Policy Surprises and Mortgage Rates

This paper examines the magnitude and persistence of the mortgage rate pass-through in response to U.S. monetary policy surprises. The policy surprises are measured by both the surprise changes to the target federal funds rate (the target factor) and surprises in the future direction of the Federal Reserve monetary policy (the path factor). We find that within the week of the FOMC announcements, both the target and path factors have significantly positive impacts on the 1-year ARM rates. In addition, the impact of the target factor on the 1-year ARM rates lasts up to one week after the announcement. We also find that the target factor has a one-week lagged impact on the 30-year fixed mortgage rate. Thus, short-term adjustable mortgage rates experience higher degree of pass-through and faster adjustment speed than long-term fixed mortgage rates. Furthermore, there exist the asymmetric adjustments of U.S. mortgage rates, and the pass through of mortgage rates in responses to monetary policy surprises are affected by the size of monetary policy surprises, the direction of business cycle and whether monetary policy is tightening or loosening. We also find that there exists heterogeneity in the mortgage rate pass-through process across regions. The cross-region variation in the response to the target factor is correlated with growth in income and the unemployment rate in the region, while the cross-region variation in the response to the path factor is mainly related to the housing market factors, such as the rental vacancy rate.

Term structure surprises: the predictive content of curvature, level, and slope

SUMMARYThis paper analyzes the predictive content of the term structure components level, slope, and curvature within a dynamic factor model of macroeconomic and interest rate data. Surprise changes of the three components are identified using sign restrictions, and their macroeconomic underpinnings are studied via impulse response analysis. The curvature factor is found to carry predictive information both about the future evolution of the yield curve and the macroeconomy. In particular, unexpected increases of the curvature factor precede a flattening of the yield curve and announce a significant decline of output more than 1 year ahead. Copyright © 2010 John Wiley & Sons, Ltd.

STATE DEPENDENCY OF BANK STOCK REACTION TO FEDERAL FUNDS RATE TARGET CHANGES

AbstractWe investigate the effects of changes in the federal funds target rate on bank stock returns through an event‐study analysis. We examine the state dependency of such effects and focus on the surprise elements of policy changes derived from the federal funds futures market. Although we confirm an inverse relation between bank stock returns and changes in the federal funds target rate previously supported in the literature, we find that bank stock returns only respond to surprise or unexpected changes in the federal funds target rate. We also find that such responses are conditional on the context in which policy changes take place.

Analysis of multi-pollutant policies for the U.S. power sector under technology and policy uncertainty using MARKAL

Abstract Investments in power generation, pollution controls, and electricity end use equipment are made in the face of uncertainty. Unanticipated events can cause regret—commitments that in retrospect were the wrong choices. We analyze how three uncertainties—electricity demand growth, natural gas prices, and power sector greenhouse gas regulations—could affect electric power sector investment decisions and costs in the U.S. over the next four decades. The effect of multi-pollutant regulations such as the Clean Air Interstate Rule (CAIR) upon these decisions and costs is also considered. We use decision trees to structure the problem, defining multiple futures for each uncertainty and then simulating how the U.S. energy market responds to them. A two-stage stochastic version of the energy-economy model MARKAL simulates the market. Relative importance of the uncertainties is assessed using two indices: expected cost of ignoring uncertainty (ECIU) and expected value of perfect information (EVPI). We also calculate the value of policy coordination (VPC), the cost saved by avoiding surprise changes in policy. An example shows how a stochastic program can be used to compute these indices. The analysis shows that the possibility of greenhouse gas regulation is the most important uncertainty by these measures.

Monetary policy surprises and international bond markets

We examine the impact and spillover effects of monetary policy surprises on international bond returns. Within the framework of Campbell and Ammer (1993), we decompose international bond returns into news regarding future returns, real interest rates and future inflation for Germany, the U.K. and the U.S. We examine how excess bond returns in these three countries are affected by surprise changes in monetary policy in each country. Our measure of the unanticipated element of monetary policy is based on futures markets rather than the more traditional vector autoregression. Our results indicate that excess bond returns primarily react to domestic as compared to foreign monetary policy surprises. We also find there is a strong divergence between the effects of domestic monetary policy on excess bond returns in Germany relative to the U.K. A surprise monetary tightening in Germany (U.K.) leads to a rise (fall) in the excess holding period return. We trace this effect to news about lower (higher) inflation expectations and could be potentially rationalized by differences in the credibility of the monetary policy authority in each country.

Abstracts

Abstracts

U.S. Monetary Policy Surprises and International Securitized Real Estate Markets

This paper examines the impact of U.S. monetary policy surprises on securitized real estate markets in 18 countries. The policy surprises are measured by both the surprise changes to the target federal funds rate (the target factor) and surprises in the future direction of the Federal Reserve monetary policy (the path factor). The results show that most international securitized real estate markets have significantly positive responses to surprise decrease in current or future expected federal funds rates, though such responses vary greatly across countries. Also, while the U.S. securitized real estate market reacts mainly to the target factor, foreign securitized real estate markets react to the path factor. Furthermore, we find that the cross-country variation in the response to the target factor is correlated with the country’s exchange rate regime and its degree of real economic and particularly financial integration, while the cross-country variation in the response to the path factor is mainly related to the country’s degree of financial integration.

Letting Different Views about Business Cycles Compete

There are several candidate explanations for macro-fluctuations. Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference or more generally a demand shock. More recently two other explanations have been advocated: surprise changes in investment specific technology and news about future technology growth. The aim of this paper is to provide a quantitative assessment of the relative merits of all these explanations by adopting a framework which allows them to compete. In particular, we propose a co-integrated SVAR approach that encompasses all 5 shocks and thereby offers a coherent evaluation of the dynamics they induce as well as their contribution to macro volatility. Our main finding is that surprise changes in technology, whether it be of the disembodied or embodied nature, account for very little of fluctuations. In contrast, expected changes in technology appear to be an important force, with preference/demand shocks and monetary shocks also playing non-negligible roles.(This abstract was borrowed from another version of this item.)

Surprising Twist on Auditory Representation. Focus on: “What's That Sound? Auditory Area CLM Encodes Stimulus Surprise, Not Intensity or Intensity Changes”

The concept of sensory representation is central to psychological theories of perception and cognition and to neurobiological models of sensory coding. Understanding exactly what a neural response “represents,” however, turns out to be a difficult question to answer fully—particularly for neurons many synapses away from the point of sensory transduction. A recent paper by Gill and colleagues (2007) takes a large step forward in understanding stimulus representation in the auditory system. To appreciate the contribution this paper makes, it’s helpful to have a little background. To a first approximation, sensory systems and the receptive fields they comprise are organized hierarchically. The concept of a “receptive field” was first applied to the visual system (Hartline 1938) to describe the sensitivity of optic nerve fibers to light shined on spatially restricted portions of the retina. While neurons in primary visual cortex inherit the spatial receptive fields of the retinal projections, they respond to oriented bars or edges rather than spots of light. At higher levels in the visual pathway, cells respond best to complex

What's That Sound? Auditory Area CLM Encodes Stimulus Surprise, Not Intensity or Intensity Changes

High-level sensory neurons encoding natural stimuli are not well described by linear models operating on the time-varying stimulus intensity. Here we show that firing rates of neurons in a secondary sensory forebrain area can be better modeled by linear functions of how surprising the stimulus is. We modeled auditory neurons in the caudal lateral mesopallium (CLM) of adult male zebra finches under urethane anesthesia with linear filters convolved not with stimulus intensity, but with stimulus surprise. Surprise was quantified as the logarithm of the probability of the stimulus given the local recent stimulus history and expectations based on conspecific song. Using our surprise method, the predictions of neural responses to conspecific song improved by 67% relative to those obtained using stimulus intensity. Similar prediction improvements cannot be replicated by assuming CLM performs derivative detection. The explanatory power of surprise increased from the midbrain through the primary forebrain and to CLM. When the stimulus presented was a random synthetic ripple noise, CLM neurons (but not neurons in lower auditory areas) were best described as if they were expecting conspecific song, finding the inconsistencies between birdsong and noise surprising. In summary, spikes in CLM neurons indicate stimulus surprise more than they indicate stimulus intensity features. The concept of stimulus surprise may be useful for modeling neural responses in other higher-order sensory areas whose functions have been poorly understood.

The Impact of Component Modularity on Design Evolution: Evidence from the Software Industry

Much academic work asserts a relationship between the design of a complex system and the manner in which this system evolves over time. In particular, designs which are modular in nature are argued to be more evolvable, in that these designs facilitate making future adaptations, the nature of which do not have to be specified in advance. In essence, modularity creates option value with respect to new and improved designs, which is particularly important when a system must meet uncertain future demands. Despite the conceptual appeal of this research, empirical work exploring the relationship between modularity and evolution has had limited success. Three major challenges persist: first, it is difficult to measure modularity in a robust and repeatable fashion; second, modularity is a property of individual components, not systems as a whole, hence we must examine these dynamics at the microstructure level; and third, evolution is a temporal phenomenon, in that the conditions at time t affect the nature of the design at time t+1, hence exploring this phenomenon requires longitudinal data. In this paper, we tackle these challenges by analyzing the evolution of a successful commercial software product over its entire lifetime, comprising six major releases. In particular, we develop measures of modularity at the component level, and use these to predict patterns of evolution between successive versions of the design. We find that modularity has a strong and unambiguous impact on design evolution. Specifically, we show that i) tightly-coupled components are harder to kill, in that they have a greater likelihood of survival in subsequent versions of a design; ii) tightly-coupled components are harder to maintain, in that they experience more surprise changes to their dependency relationships that are not associated with new functionality; and iii) tightly-coupled components are harder to augment, in that the mix of new components added in each version is significantly more modular than the legacy design.

Consumption, Wealth, and Indebtedness in the Context of Uncertainty: The Consumption Function Meets Portfolio Theory

The objective of this paper is to provide a sound theoretical framework for the empirical analysis of consumer indebtedness, by integrating Portfolio theory with the Life-Cycle hypothesis (LCH) model of consumption. Modern versions of this LCH theory almost always assume that utility is additive over time, but in this study, the multiplicative Cobb–Douglas function is used. The new synthesis also explains the stochastic properties of consumption more fully and clearly than previous studies, in particular the uncertainty arising from rates of return on risky assets. The new theory will also help to improve the explanation of the surprise changes in consumption because these sources of risk are incorporated explicitly into the analysis.

US monetary policy announcements and Irish stock market volatility

The influence of foreign monetary policy decisions on the volatility of the Irish stock market is investigated. Specifically, the influence of US monetary policy announcements on the ISEQ is examined. Evidence of the so-called calm before the storm is found, i.e., there appears to be a decline in volatility on the day prior to an FOMC meeting and a subsequent increase in volatility after the results of the FOMC meeting is made known. Also evidence is found to suggest that ISEQ volatility is influenced by surprise changes in US monetary policy. Moreover, US monetary surprises appear to affect Irish stock return volatility asymmetrically with a surprise tightening of US monetary policy leading to an increase in Irish stock return volatility. This paper represents an important step in addressing the issues of spillover identification between the USA and the Irish stock market.