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the β’s can form a convex shape during some periods and concave during others,
yielding a sort of wave with decreasing amplitude. Since a priori we believe that the
news release will affect the bond future price smoothly and with periods of positive
effect and periods of negative effect, we set three as the degree of the polynomial.
Substituting (4) into (3) we obtain
ð1LÞTYt ¼ 0
P p
i¼0
þ :::þ 3
Nt i ENt ½ iŠ
þ 1
Pp iNt ð i ENt ½ iŠÞ
P
i¼0
p
i3ðNtiENt ½ iŠÞ
þ "t
i¼0
¼ 0zt;0 þ 1zt;1 þ :::þ 3zt;3 þ "t ¼ AZt þ "t;
The matrix of parameters A can be estimated by OLS if the error term fulfills the
classical assumptions. The variance/covariance matrix of bA , is estimated with
0 bA
the White estimator.
It is worth making a note on stationarity and variance effects. The bond future
has a unit root. Hence (1−L)TY t=ΔTYt will be stationary. The exogenous variables
are stationary since we are not analyzing the effect of the macroeconomic number
on the future prices but on the news. That is, the forecasting error is always stationary.
Finally, conditioning the matrix of coefficients to the business cycle and the sign of
the forecast error is immediate and similar to (2).
4 Data
D. Veredas
TY and the macroeconomic numbers are sampled in 10 minutes segments from
08:20 to 12:30 NY time and from April 1992 to April 2001. The sample size is
61048 observations. TY is traded at the Chicago Board of Trade (CBOT) from
08:20 am to 03:00 pm, NY time. We use 15 fundamentals, summarized in Table 1.
The forecast of the fundamentals is generated (from surveys conducted before the
announcement) and released by MMS International.
The choice of the fundamentals is such that they represent the real economy
(UNEM, UNEMW, NFP, RS, HS and BI), inflation (PPI, CPI), supply and demand
confidence (ISM and CC) and export-import (TB). We do not consider monetary
fundamentals such as M1 and the Fed interest rates. The former does not affect the
TY and the latter is not a proper fundamental but rather a consequence of the
fundamentals, i.e. the Fed acts according to the fundamental releases.
For the futures contracts, some transformation is needed since they mature
every three months and hence often have different pricing, producing a discontinuity.
We rollover the future contracts when the open interest rate becomes greater
in the next contract (this usually means that the following contract is the more
liquid contract) using linear interpolation.
Further, notice that data are sampled from 08:20 a.m. to 12:30 p.m. NY time,
while the market closes at 03:00 p.m. We discard all the observations from
12:30 p.m. to 03:00 p.m. There are three reasons to consider the 08:20–12:30
interval. First, the aim of the paper is to analyze the news impact of macroeconomic
numbers on the bond future prices. If the news impact stands only for a few hours,
as we believe, and as most of the news is released at 08:30 a.m. NY time, the news
(6)