What Moves the Bond Market? Fleming and Remolona.
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Transcript of What Moves the Bond Market? Fleming and Remolona.
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What Moves the Bond Market?
Fleming and Remolona
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Introduction
• The goal is to identify the factors that may explain large price changes and large surges in trading activity in the bond market.
• To that end, the authors instrument statistical exercises to determine the association between bond market movements and announcements of economic indicators.
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Structure of the Document
• Anecdotal Evidence• Correlation of price changes and trading surges
with release times of macroeconomic conditions.
• Formal Analysis• Econometric exercise to evaluate the impact of:
» Type of announcement» Magnitude of the surprise element» Market conditions
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Methodology and Data
• The bond market is represented with the five-year U.S. Treasury note.
• High-frequency intraday data for bond market activity is employed.
• Dates and release times for 21 economic indicators.
• The sample period is from August 23, 1993 to August 19, 1994.
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Anecdotal Evidence
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Econometric Analysis
• Run a regression
• Dependent variables:• Price volatility as measured by the percentage
change in the five minute interval following an announcement.
• Trading activity: number of transactions during the one-hour interval following the announcement.
• Independent variables: • Announcement dummy variables.
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Announcement Surprises
• Add to the regression a variable to measure the surprise component of announcements:
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Market Conditions• Introduce two measures of uncertainty:
• Volatility derived from options on then-year U.S. Treasury notes.
• Expected change in the fed funds rate.
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Conclusions
• Each of the 25 sharpest price changes and greatest trading surges are associated with a just-released announcement.
• The largest responses are correlated, in order of importance, with the employment report, producer price index, federal funds target rate, and the consumer price index.
• Bond market activity responds significantly to the “surprise” component of announcements and market conditions.