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Macroeconomic surprises and short-term behaviour in bond futures 273
lems encountered by taking a particular bond (for instance, when a bond matures its
price represents shorter and shorter yields). Regarding the fundamentals, we chose
15 different numbers, representing wide areas of the economy such as real economy,
inflation, confidence indexes and export-import measures (we refer to Table 1
and Section 4 for further details).
The second component that affects short run jumps in asset prices is the
momentum of the business cycle. Following recent literature on behavioural finance
and Veronesi (1999), we conjecture that the effect of the fundamentals on TY
depends on the general economic situation of the economy. For example, it is
intuitive to believe that the effect of a positive surprise in the unemployment rate
on the TY is not the same when the business cycle is in contraction as when it is
in expansion. As measure of the business cycle we use the Institute for Supply
Management Survey (ISM) index. The difference between ISM and other
measures of the business cycle, such as GDP, is that it is the most forwardlooking
measure available of the market since it is based on expectations. The
ISM index is the result of a survey among 300 people selected from 20 manufacturing
industries. The survey includes questions related to new orders, production,
employment, supplier deliveries and inventories (see Niemira and Zukowsky
(1998, chapter 19) for further details). In order to see the effect of the fundamentals
on the TY, we divide the ISM according to two criteria: 1) if it is expanding or
contracting and 2) if it is above, below or in between (differentiating as well
expansions and contractions) upper and a lower thresholds (further details are
given in Section 4).
Ideally, we would like to estimate a model like
ð1LÞTYt ¼ ½ 1: þ 2ðtrend strength of the business cycletÞ
þ ðtrend strength of TY ÞðN Š E½N ŠÞ þ ";
3 t t t t (1)
where Nt is the fundamental, E [N t] its expectation, and hence Nt EN ½ tŠ
is the
forecasting error (or surprise or news).
The effect of the news in TY is caused by the news itself as well as by the trend
strength of the business cycle and the trend strength of the future bond. At each
point in time, the market has a working hypothesis as to where the economy is and
where it is going. Simplistically, the macroeconomic releases are testing the market
hypothesis. No drastic price response should be seen if the number falls in a
reasonable range around the expectations. If the macroeconomic releases fall
beyond the reasonable bounds, measured by the forecasting error, the re-pricing
effect should be proportional to the forecast error (coefficient α1).
In reality, more factors are at work and they should be evident mostly around
the changes in macroeconomic trends. In general, agents are not very good at
calling market tops or bottoms and when the economy is perceived to be turning,
one usually sees a rush to close or reverse existing positions. Agents are unsure of
whether a turn is occurring or whether the number is a statistical fluke in the
macroeconomic trend. So we expect an asymmetry in the market’s response to
positive or negative forecast errors at perceived phases of the economic cycle. This
is represented by coefficient α2.
This asymmetry can be exacerbated by the net positioning of the speculator and
hedgers community. The speculators community are usually trend followers and