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The Planet Money podcast covers the latest research on central bank policy, unemployment numbers, GDP, and more. This week we discuss an interesting new study on the impact of economic news.
Economic announcements typically lead to adjustments in the prices of financial assets, such as stocks, bonds, and foreign exchange rates. A small unexpected change in one economic indicator might rock asset prices over a short period, while shifts in other indicators may not be immediately apparent or have no effect at all. But how do we measure the effects of economic news? Previous studies on the impact of economic announcements often defined news by comparing it to predictions generated by an empirical forecasting model. This practice makes the resulting measure of news dependent on the specific model used to generate the forecasts, and it can lead to underestimations of the effects.
This new study, by Rigobon and Sack, develops a method for measuring news that is less dependent on the model used to generate the forecasts. They introduce a “measured news” variable that is the difference between an asset price or yield response and the expected response based on surveys conducted before the actual data release.
This approach helps correct for measurement errors that arise from survey estimates of market expectations, which are typically collected with a lead time that can range from a few days to a week or more. Using measured news instead of the standard definition of news (true news minus true news at survey time) improves the estimate of the asset price response to economic announcements.