Does Economic News Affect Asset Prices Through Expected Changes in Monetary Policy?

“…asset prices will also respond to revisions in expectations about future policy, which in turn may be driven by news about changing economic conditions. ” Bernanke and Kuttner (2005) In this paper we test the Bernanke/Kuttner conjecture by studying the effects of “news about changing economic conditions ” on prices in the federal funds futures market. This conjecture bears on the question of why economic news affects asset prices generally. The main prediction of the efficient markets hypothesis is that short-run asset price changes are the result of new information arriving in the market and thus are unpredictable. Asset-pricing theories specify what news should matter and why. Empirical work largely supports the prediction that asset prices quickly respond to news events, although identified news events typically explain only a small fraction of asset price changes. For the U.S., the most common finding is that news that is assumed to signal a stronger economy raises interest rates, causes an appreciation of the dollar, and has effects on the stock market that depend on the state of the economy. 1 It is harde