recent developments in high frequency financial ... - Index of

Macroeconomic surprises and short-term behaviour in bond futures 277
65
60
55
50
45
Top
Expansion Contraction
Bottom
40
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109
65
60
55
50
45
Expansion Contraction
40
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109
Fig. 2 Business cycle divisions with the symbols used in Tables 2 and A1–A12
impact on TY should be hardly distinguishable after 12:30 p.m. Second, lunchtime
typically starts at 12:00, and hence the trading activity slows down sharply,
implying that necessarily the news effect vanishes. Finally, after lunch and before
03:00 p.m. (close) the price action may be somewhat distorted by the activity of
the bond pit locals whose activity is not related to the fundamentals releases but
they take intraday positions and close them towards the end of the session.
Where do an expansion and a contraction begin? A well known measure of
the momentum of the economy is the NBER dates of recessions and expansions.
However, as noticed by McQueen and Roley (1993), the NBER turning points
only classify the direction of the cycle rather than the level. Instead, we consider
the ISM. It is more widely used among fixed income traders than the NBER
indicator since it represents more accurately the cycles of the bonds and it has been
proven to provide a forward-looking indication of the business cycle direction. We
consider two different divisions of the business cycle: 1) expansions and contractions
and 2) top and bottom.
With respect to the first division, a change of trend is produced when it stands
for at least three periods, as commonly accepted among bank’s analysts (see top
plot of Fig. 2). The second division requires longer explanation. McQueen and
Roley (1993) analyse the news effect on the S&P500 in different phases of the
business cycle. They measure the business cycle with IP. The levels of high,
medium and low economic activity are determined by estimating a trend and then