There are three completed papers and ongoing work. One of the papers introduces new methodology to study the relationship between asset prices and macroeconomic news. The key insight is that while market participants perceive various kinds of news, researchers only see as “news” headline items for which there are surveys. Hence, markets react to more news than is observable to researchers. My research group and I developed a method that estimates what the unobserved news look like, and what the market reaction to these is. When studied using this method, it turns out that macroeconomic data releases explain essentially all of yield curve changes in the intraday windows in which the releases take place. It also turns out that yield curve reactions to data releases are not asymmetric.
Other work, in conjunction with economists at the ECB, an eventstudy database of euro area monetary policy is constructed and market perceptions of ECB policy communication is studied. The database is public and the ECB will keep it updated, this will help monetary policy research in Europe. We learned that market reactions to ECB communication has been remarkably stable but that policy communication itself has changed over time. And, again, we did not find signs of asymmetric reactions of interest rates to policy releases.
The last completed paper focuses on the heterogeneity in stock price reactions to monetary policy. When stock indices go up or down in response policy surprises, not all firms’ stock prices go up or down equally, not even for firms within the same sectors. But why? We relate the difference to firms’ balance sheets and the sensitivity of their cash flows to monetary policy. We devise tests to understand whether stock market participants, on average, know the balance sheets of these firms or use rules of thumb and find that there is remarkable sophistication in stock markets. We then show that firms that have more sensitive cash flows to monetary policy also see their investment more affected by monetary policy. This is very strong evidence for cash flow sensitivity of investment, and helps isolate a transmission channel for monetary policy.
Ongoing work focuses on why market reactions to monetary policy may be time varying, on measuring policy surprises in the US, and on applying the new event study methodology to European data.
