A new study finds that economic news can have surprisingly strong effects on asset prices. It’s particularly true for interest rates, which tend to respond to information about the economy’s strength that isn’t expected to be passed on through prices or inflation.
But the impact isn’t as large on stock prices. That’s because the shock to stock prices from economic news is often less pervasive. The data we’ve studied show that only about one in five economic announcements give rise to a stock price response that is statistically significant and measurably persistent through 4 p.m. (see the chart below).
In our work, we’ve tried to understand why. A key finding is that the standard approach to estimating asset price responses to survey-based economic news has some serious problems. For one, surveys are conducted in advance of the news release—with leads ranging from a few days to a week or more. This means that by the time the survey is released, a lot of “measured news” has already accumulated, and some of it may be false or irrelevant to the current situation. This accumulated information also tends to distort the estimate of the economic news effect, making it smaller than it is in reality. This is why we’ve developed the Rigobon-Sack method for estimating asset price responses to economic news. The estimates we produce using this methodology agree in sign with those produced by our standard approaches and are typically larger than the estimated effects from measured news alone.