Working Paper: NBER ID: w9914
Authors: Alessandro Beber; Michael W. Brandt
Abstract: We examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the U.S. Treasury market by comparing the option-implied state-price density (SPD) of bond prices shortly before and after the announcements. We find that the announcements reduce the uncertainty implicit in the second moment of the SPD regardless of the content of the news. The changes in the higher-order moments, in contrast, depend on whether the news is good or bad for economic prospects. Using a standard model for interest rates to disentangle changes in beliefs and changes in preferences, we demonstrate that our results are consistent with time-varying risk aversion in the spirit of habit formation.
Keywords: macroeconomic announcements; state-price density; US Treasury market; risk aversion; options market
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic announcements (E60) | uncertainty in the second moment of the SPD (C69) |
| bad news (Y70) | risk aversion (D81) |
| macroeconomic announcements (E60) | changes in beliefs and preferences of market participants (D84) |
| bad news (Y70) | SPD more akin to PDF (C69) |
| macroeconomic announcements (E60) | changes in higher-order moments of the SPD (C69) |