The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market

43 Pages Posted: 24 Jul 2003

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2003

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 the time-varying risk aversion in the spirit of habit formation.

Suggested Citation

Beber, Alessandro and Brandt, Michael W., The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market (July 2003). Available at SSRN: https://ssrn.com/abstract=424365 or http://dx.doi.org/10.2139/ssrn.424365

Alessandro Beber

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michael W. Brandt (Contact Author)

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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