NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market

Alessandro Beber, Michael W. Brandt

NBER Working Paper No. 9914
Issued in August 2003
NBER Program(s):   AP

We examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the U.S. Treasury market by comparing the option-implied state-price density (SPD) of bond prices shortly before and after the announcements. We find that the announcements reduce the uncertainty implicit in the second moment of the SPD regardless of the content of the news. The changes in the higher-order moments, in contrast, depend on whether the news is good or bad for economic prospects. Using a standard model for interest rates to disentangle changes in beliefs and changes in preferences, we demonstrate that our results are consistent with time-varying risk aversion in the spirit of habit formation.

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Document Object Identifier (DOI): 10.3386/w9914

Published: Beber, Alessandro and Michael W. Brandt. "The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market." Journal of Monetary Economics 53 (2006): 1997-2039.

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