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

Macroeconomic surprises and short-term behaviour in bond futures 281
and industrial sector but wait for the CPI before gaining a precise idea of the
inflation.
5.2.3 Table A12
Even in the less exhaustive case, PI, GDP, BI and TB do not have any effect
on TY except, very vaguely, PI. The statistical significance of the coefficients is
below acceptance and we will not push the analysis further.
In summary, the market also seems to have a general bias when it approaches
certain numbers. We call a Bearish Bias a situation where the expected sell-off is
larger in magnitude than the expected rally for the same absolute value of the
forecast error and the opposite sign. Also the Bullish Bias is where the expected
rally is larger in magnitude than the expected sell-off for the same absolute value
of the forecast error and the opposite sign. Across the sample we draw the conclusions
that there is a Bearish Bias for news coming from CC, CPI, and IP, and a
Bullish Bias for news coming from UNEM, ISM, NFP, RS and UNEMW.
Table 2 summarizes the effect of all the fundamentals in TY for each stage of
the business cycle. It shows the number of significant coefficients for each phase
of the business cycle. The left side of the Table (first four columns) indicates that
the market reacts more when the economy is in the top of the cycle and when it is
contracting. In other words, the market feels that the business cycle is at the top
and therefore sooner or later the cycle will start its downward trend, but they do
not know when. After the first signals of weakness, the economy starts to contract
and the market, which can feel the turn in the cycle, eagers for further signals that
confirm the negative trend. Any news therefore has an effect. By contrast, when
the economy is expanding, the market is confident about its strength and so news,
of any kind, affects the bond future much less.
The right and middle parts of the Table give a more refined history. Last four
columns show that the market responds more strongly to bad news in good times
than in bad times. This confirms the theories of behavioural finance and Veronesi
(1999), as well as Conrad et al. (2002) findings. The market responds strongly
when the economy is contracting. This is again a confirmation that when the cycle
is downward, TY reacts to bad news more than when the economy is growing.
Results
in the middle columns are not so enlightening. In particular, good
news does not have the largest impact in the bottom of the cycle, but when the
economy is contracting. It may be an indication that, when the business cycle is
downward, the market is uneasy and afraid that the negative trend may continue.
In this context, any forecasting error, positive or negative, introduces more
uncertainty to the market and in turn induces a reaction in prices. This result
nicely dovetails
with the results in the left columns. Conversely, when the
economy is expanding, the effect of positive news is smaller than in any other
phase of the cycle. This again dovetails with the equivalent result in the left
columns.
In summary, bad news has a stronger effect in good times than in bad times and
good news has little effect in bad times. And when the economic phase is downward,
any news has a strong effect but when the phase is upward, news has barely
any effect.