Do futures markets react efficiently to predictable errors in Government Announcements?
✍ Scribed by David E. Runkle
- Publisher
- John Wiley and Sons
- Year
- 1992
- Tongue
- English
- Weight
- 598 KB
- Volume
- 12
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Introduction
espite great interest in the effect of government announcements on financial D markets, there are no empirical tests of whether futures markets react efficiently to predictable errors in government announcements of economic data. Efficient markets theory suggests that the predictable component of government announcements should have no significant effect on short-term movements in asset prices. However, the only existing tests of futures price reactions to government announcements assume that errors in government forecasts have no predictable component. This is not necessarily true. In fact, errors in government forecasts often contain a predictable component.'
This article tests whether prices of live-hog futures contracts react to the predictable component in the errors in U.S. government announcements about farmers' sowfarrowing intentions. This test is performed by jointly estimating two equations. The first equation predicts actual sow farrowings, given information available at the time that the farrowing intentions announcement is released. Using that prediction, the error in the announcement can be split into a predictable and an unpredictable component. The second equation estimates the relation between both the predictable and the unpredictable components in the errors in the sow-farrowing intention announcements and changes in live-hog futures prices at around the time that actual sow farrowings are announced. These equations are estimated using robust statistical methods that require minimal distributional assumptions. The results of the estimation show no significant relationship between predictable errors in government livestock announcements and subsequent movement in futures prices. This finding suggests that live-hog futures prices are efficient with respect to the farrowing announcements, because those prices have already efficiently incorporated the predictable component of errors in government sow-farrowing forecasts by the time that the government announces actual sow farrowings.
The views expressed herein are those of the author and not necessarily those of the Federal Reserve 'See Mankiw, Runkle, and Shapiro (1984) and Runkle (1991).
Bank of Minneapolis or the Federal Reserve System.