RDP 2004-10: News and Interest Rate Expectations: A Study of Six Central Banks Appendix B: Econometric Results

Ellis Connolly and Marion Kohler

November 2004

Lag specifications

Equations (3) and (6) (they are repeated below for convenience) specify the GARCH model for each economy and each futures contract. In order to determine the number of lags, the model for the 4th futures contract was estimated in a general specification and insignificant lags excluded. In order to allow for comparability, the same reduced model was estimated for the other contracts and for the models in Equations (1) and (2).[19]

Table B1 summarises the resulting lag structure for the models of each economy.

Table B1: Lag Specifications for EGARCH Models
4th contract, January 1997–June 2004
  Australia Canada Euro area NZ UK US Panel
Mean equation
Lags of dependent variable (j) 1 0 5 3 3 3 0
Lags of overseas futures (m) 1 1 3 3 3 – 1
Variance equation
Lags of standardised residual (n) 3 5 4 5 4 5 5
Lags of logged conditional variance (p) 0 0 0 0 0 1 0
Results for the mean equation

We included in the mean equation all the macroeconomic data releases for each economy for which we could obtain matching data on markets' expectations from Bloomberg. We then reduced this model by excluding those releases that were found to have no effect for the 4th contract. In order to maintain comparability across the different futures contracts, we then used the same model for all contracts. The selected models would have been broadly the same if we had applied the reduction methodology for each futures contract separately.

A list of all the data releases included initially and the detailed econometric results for the mean equation are available on request from the authors.

Results for the variance equation

In this section we present details of the estimation results for the variance equation. For each economy, we present the results from the EGARCH estimation for all eight futures contracts. We also present the graphical illustration of these results using the transformation discussed in the main text on page 25, except for the Australian results and the panel results, which are illustrated in Figures 2 and 6.

Table B2: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for Australia
January 1997–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 0.81***
(0.29)		 0.74***
(0.29)		 0.70**
(0.33)		 0.46
(0.36)		 0.23
(0.41)		 0.17
(0.41)		 0.16
(0.47)		 0.22
(0.44)
Unscheduled rate moves {2.23***}
(0.30)		 {1.89***}
(0.22)		 {2.05***}
(0.30)		 {1.87***}
(0.33)		 {1.61***}
(0.18)		 {1.12***}
(0.30)		 {0.57}
(0.39)		 {−0.33}
(0.55)
‘No move’ decisions – – – – – – – –
Rate decisions without commentary
Rate moves – – – – – – – –
‘No move’ decisions −0.62
(0.19)		 −0.47
(0.26)		 −0.34
(0.25)		 −0.47
(0.26)		 −0.36
(0.26)		 −0.38
(0.25)		 −0.32
(0.25)		 −0.30
(0.23)
Reports 1.20***
(0.33)		 1.06***
(0.26)		 1.01***
(0.25)		 0.80***
(0.27)		 0.79***
(0.28)		 0.79***
(0.29)		 0.74***
(0.27)		 0.71***
(0.24)
Parliamentary hearings 0.81*
(0.45)		 1.53***
(0.47)		 1.51***
(0.47)		 1.25**
(0.53)		 1.06**
(0.53)		 0.83
(0.53)		 0.67
(0.48)		 0.47
(0.41)
Minutes of meetings – – – – – – – –
Speeches 0.17
(0.25)		 0.51**
(0.27)		 0.48*
(0.26)		 0.46**
(0.22)		 0.45**
(0.19)		 0.40**
(0.18)		 0.34**
(0.15)		 0.35***
(0.14)

Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution.
Table B3: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for Canada
January 1997–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 1.00***
(0.21)		 1.12***
(0.26)		 1.12***
(0.24)		 1.09***
(0.30)		 1.24***
(0.31)		 1.23***
(0.36)		 1.28***
(0.34)		 1.11***
(0.36)
Unscheduled rate moves 1.82
(1.80)		 0.43
(0.56)		 0.67
(0.57)		 0.76
(0.69)		 0.75
(1.09)		 0.88
(0.97)		 0.79**
(0.36)		 0.71**
(0.33)
‘No move’ decisions 0.50***
(0.20)		 −0.78
(0.35)		 −0.17
(0.40)		 0.25
(0.31)		 −0.24
(0.36)		 0.00
(0.33)		 0.03
(0.35)		 −0.16
(0.38)
Rate decisions without commentary
Rate moves – – – – – – – –
‘No move’ decisions – – – – – – – –
Reports 1.06**
(0.51)		 0.90**
(0.42)		 0.93**
(0.40)		 0.63*
(0.39)		 0.38
(0.35)		 0.16
(0.33)		 0.20
(0.27)		 0.37
(0.41)
Parliamentary hearings −0.43
(0.29)		 −0.19
(0.35)		 0.29
(0.36)		 0.33
(0.45)		 0.15
(0.43)		 0.19
(0.45)		 0.08
(0.43)		 −0.14
(0.50)
Minutes of meetings – – – – – – – –
Speeches 0.10
(0.19)		 0.20
(0.23)		 0.48
(0.29)		 0.40
(0.33)		 0.08
(0.23)		 0.03
(0.20)		 0.19
(0.19)		 0.16
(0.18)

Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution.
Table B4: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for the Euro Area
January 1999–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 1.51*
(0.80)		 1.73***
(0.51)		 1.50***
(0.36)		 1.42***
(0.29)		 1.29***
(0.27)		 1.16***
(0.29)		 1.17***
(0.31)		 1.14***
(0.36)
Unscheduled rate moves {3.11}
(3.99)		 {4.08**}
(1.76)		 {3.95***}
(0.88)		 {3.76***}
(0.25)		 {3.05***}
(0.22)		 {1.93***}
(0.32)		 {1.13***}
(0.21)		 {−13.5}
(1.01)
‘No move’ decisions 0.71***
(0.24)		 0.64***
(0.23)		 0.64***
(0.24)		 0.71***
(0.25)		 0.70***
(0.24)		 0.68***
(0.24)		 0.64***
(0.25)		 0.66***
(0.26)
Rate decisions without commentary
Rate moves – – – – – – – –
‘No move’ decisions 0.09
(0.28)		 −0.06
(0.20)		 −0.18
(0.19)		 −0.18
(0.21)		 −0.21
(0.22)		 −0.22
(0.22)		 −0.17
(0.23)		 −0.15
(0.22)
Reports 0.21
(0.16)		 0.29
(0.19)		 0.12
(0.18)		 0.00
(0.17)		 −0.03
(0.18)		 0.04
(0.19)		 0.12
(0.19)		 0.17
(0.19)
Parliamentary hearings 0.57**
(0.24)		 0.26
(0.24)		 0.13
(0.23)		 0.08
(0.23)		 −0.04
(0.23)		 −0.15
(0.22)		 −0.28
(0.21)		 −0.27
(0.22)
Minutes of meetings – – – – – – – –
Speeches −0.39
(0.10)		 −0.30
(0.10)		 −0.29
(0.10)		 −0.24
(0.10)		 −0.22
(0.10)		 −0.18
(0.10)		 −0.18
(0.10)		 −0.18
(0.10)

Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution.
Table B5: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for New Zealand
March 1999–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 1.95***
(0.43)		 1.29***
(0.31)		 0.64*
(0.38)		 0.32
(0.31)		 0.22
(0.27)		 −0.14
(0.31)		 0.29
(0.31)		 0.49*
(0.28)
Unscheduled rate moves – – – – – – – –
‘No move’ decisions 1.80***
(0.40)		 2.02***
(0.36)		 1.67***
(0.48)		 1.43***
(0.50)		 0.58
(0.38)		 0.30
(0.36)		 0.34
(0.29)		 1.09**
(0.50)
Rate decisions without commentary
Rate moves – – – – – – – –
‘No move’ decisions {−1.44}
(0.33)		 {−1.69}
(0.39)		 {−2.37}
(0.25)		 {−1.30}
(0.49)		 {−1.54}
(0.79)		 {−0.04}
(0.63)		 {−0.43}
(0.54)		 {−0.23}
(0.39)
Reports −0.17
(0.52)		 0.66
(0.44)		 1.20**
(0.55)		 1.58***
(0.53)		 1.79***
(0.44)		 1.86***
(0.46)		 1.97***
(0.39)		 1.53***
(0.47)
Parliamentary hearings 0.59
(0.62)		 1.16**
(0.56)		 0.75
(0.53)		 1.40**
(0.66)		 0.33
(0.51)		 1.62***
(0.56)		 1.31***
(0.51)		 1.25***
(0.50)
Minutes of meetings – – – – – – – –
Speeches 0.51*
(0.28)		 0.30
(0.22)		 0.40**
(0.18)		 0.18
(0.19)		 0.49**
(0.20)		 0.48***
(0.19)		 0.54***
(0.22)		 0.45**
(0.20)
Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution. The model for the euro area and the panel was estimated from 1 January 1999 and for NZ from 17 March 1999. The US Fed's monetary policy report and testimony occur simultaneously, so the same coefficient is reported for both.
Table B6: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for the United Kingdom
January 1997–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 1.75***
(0.25)		 1.77***
(0.30)		 1.50***
(0.27)		 1.34***
(0.25)		 1.33***
(0.28)		 1.20***
(0.36)		 1.06***
(0.37)		 0.89**
(0.42)
Unscheduled rate moves {−2.89}
(0.95)		 {−0.88}
(0.40)		 {−1.15}
(0.40)		 {−18.81}
(0.99)		 {−12.37}
(1.01)		 {−12.31}
(1.01)		 {−10.11}
(1.01)		 {−10.26}
(1.01)
‘No move’ decisions {0.99***}
(0.29)		 {−1.78}
(0.33)		 {−4.25}
(0.71)		 {−1.28}
(0.59)		 {−0.12}
(0.61)		 {0.05}
(0.61)		 {−0.26}
(0.60)		 {−0.89}
(0.65)
Rate decisions without commentary
Rate moves {0.61}
(0.41)		 {0.76***}
(0.29)		 {0.81***}
(0.30)		 {0.98***}
(0.35)		 {1.14***}
(0.40)		 {1.38***}
(0.49)		 {1.50***}
(0.59)		 {1.56**}
(0.70)
‘No move’ decisions 0.80***
(0.16)		 0.55***
(0.18)		 0.59***
(0.16)		 0.49***
(0.18)		 0.41**
(0.19)		 0.37*
(0.20)		 0.29
(0.21)		 0.32*
(0.19)
Reports 0.44
(0.27)		 0.41*
(0.22)		 0.32
(0.23)		 0.18
(0.22)		 0.11
(0.21)		 0.02
(0.17)		 0.02
(0.17)		 −0.11
(0.19)
Parliamentary hearings 0.35
(0.33)		 1.00*
(0.61)		 1.22
(0.76)		 1.15*
(0.68)		 0.95
(0.82)		 0.98
(0.77)		 1.04
(0.65)		 0.77
(0.60)
Minutes of meetings 0.66***
(0.19)		 0.68***
(0.18)		 0.63***
(0.16)		 0.56***
(0.15)		 0.48***
(0.15)		 0.52***
(0.15)		 0.51***
(0.17)		 0.54***
(0.18)
Speeches −0.07
(0.13)		 −0.09
(0.11)		 0.01
(0.12)		 0.01
(0.12)		 0.00
(0.12)		 −0.06
(0.13)		 −0.10
(0.14)		 −0.08
(0.14)

Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution.
Table B7: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for the United States
January 1997–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 1.34***
(0.27)		 0.87***
(0.25)		 0.90***
(0.25)		 1.02***
(0.26)		 0.91***
(0.26)		 0.81***
(0.26)		 0.72***
(0.27)		 0.72***
(0.28)
Unscheduled rate moves {1.70}
(2.94)		 {0.75}
(2.68)		 {0.29}
(1.46)		 {1.21**}
(0.53)		 {1.58***}
(0.57)		 {1.31**}
(0.56)		 {1.26**}
(0.58)		 {1.32**}
(0.56)
‘No move’ decisions 0.58
(0.47)		 0.54
(0.46)		 0.73*
(0.42)		 1.18***
(0.34)		 1.14***
(0.36)		 1.03***
(0.32)		 0.91***
(0.32)		 1.01***
(0.33)
Rate decisions without commentary
Rate moves – – – – – – – –
‘No move’ decisions 0.02
(0.33)		 −1.28
(0.31)		 −1.24
(0.30)		 −1.20
(0.24)		 −1.16
(0.29)		 −1.09
(0.29)		 −0.94
(0.31)		 −0.82
(0.31)
Reports 2.09***
(0.26)		 1.84***
(0.25)		 2.06***
(0.22)		 1.88***
(0.21)		 1.90***
(0.21)		 1.79***
(0.22)		 1.76***
(0.24)		 1.70***
(0.27)
Parliamentary hearings
Post-reports 2.09***
(0.26)		 1.84***
(0.25)		 2.06***
(0.22)		 1.88***
(0.21)		 1.90***
(0.21)		 1.79***
(0.22)		 1.76***
(0.24)		 1.70***
(0.27)
Other 1.49***
(0.45)		 1.10***
(0.35)		 0.80***
(0.27)		 0.59*
(0.32)		 0.49
(0.32)		 0.44
(0.34)		 0.42
(0.36)		 0.38
(0.36)
Minutes of meetings 0.12
(0.24)		 0.02
(0.21)		 0.07
(0.19)		 0.04
(0.18)		 −0.05
(0.18)		 −0.18
(0.18)		 −0.26
(0.17)		 −0.31*
(0.17)
Speeches 0.01
(0.14)		 0.13
(0.11)		 0.15
(0.11)		 0.13
(0.10)		 0.13
(0.10)		 0.13
(0.09)		 0.12
(0.09)		 0.13
(0.09)

Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution. The US Fed's monetary policy report and testimony occur simultaneously, so the same coefficient is reported for both.
Table B8: Effect of Central Bank Communication on Interest Rate Futures Variance Equation for the Panel
January 1999–June 2004
  Futures contract
1st 2nd 3rd 4th 5th 6th 7th 8th
Commentary with rate decisions
Scheduled rate moves 1.52***
(0.21)		 1.39***
(0.16)		 1.21***
(0.16)		 1.09***
(0.13)		 1.06***
(0.14)		 1.03***
(0.15)		 1.00***
(0.15)		 0.99***
(0.17)
Unscheduled rate moves 1.04
(1.54)		 1.46*
(0.84)		 1.11
(0.77)		 1.38
(1.38)		 1.21
(1.70)		 1.11
(1.64)		 0.95
(0.79)		 0.78
(0.56)
‘No move’ decisions 0.77***
(0.16)		 0.84***
(0.17)		 0.90***
(0.16)		 0.93***
(0.16)		 0.79***
(0.15)		 0.80***
(0.17)		 0.79***
(0.18)		 0.75***
(0.18)
Rate decisions without commentary
Rate moves {0.79}
(0.75)		 {1.44***}
(0.34)		 {1.30***}
(0.36)		 {1.28***}
(0.37)		 {1.33***}
(0.37)		 {1.68***}
(0.34)		 {1.27***}
(0.38)		 {1.10***}
(0.38)
‘No move’ decisions 0.36***
(0.13)		 −0.03
(0.13)		 −0.02
(0.12)		 −0.03
(0.12)		 0.00
(0.13)		 0.02
(0.13)		 0.04
(0.13)		 0.04
(0.12)
Reports 0.66***
(0.15)		 0.66***
(0.13)		 0.60***
(0.13)		 0.47***
(0.12)		 0.39***
(0.12)		 0.35***
(0.13)		 0.38***
(0.13)		 0.46***
(0.14)
Parliamentary hearings
Post-reports 0.76***
(0.28)		 1.18***
(0.31)		 1.16***
(0.32)		 1.15***
(0.29)		 0.92***
(0.28)		 1.04***
(0.26)		 0.96***
(0.26)		 0.81***
(0.22)
Other 0.40*
(0.21)		 0.28
(0.18)		 0.04
(0.16)		 −0.08
(0.17)		 −0.18
(0.19)		 −0.30
(0.19)		 −0.40**
(0.21)		 −0.36*
(0.22)
Minutes of meetings 0.48***
(0.18)		 0.32**
(0.16)		 0.37***
(0.15)		 0.37***
(0.14)		 0.32**
(0.14)		 0.38***
(0.14)		 0.39***
(0.15)		 0.40***
(0.16)
Speeches −0.04
(0.08)		 0.05
(0.07)		 0.09
(0.06)		 0.07
(0.06)		 0.05
(0.06)		 0.05
(0.06)		 0.02
(0.06)		 0.02
(0.06)

Notes: Numbers in brackets are Bollerslev-Wooldridge (1992) heteroskedasticity consistent standard errors. ***, **, * indicate positive coefficients are significant at the 1, 5 and 10 per cent levels, respectively. Estimates in braces are based on 10 or less events and should therefore be treated with caution. TheUS Fed's monetary policy report and testimony occur simultaneously, so the same coefficient is reported for both.
Figure B1: Communication – Canada
Same-day increase in standard deviation – variance equation
Figure B1: Communication – Canada
Figure B2: Communication – Euro Area
Same-day increase in standard deviation – variance equation
Figure B2: Communication – Euro Area
Figure B3: Communication – New Zealand
Same-day increase in standard deviation – variance equation
Figure B3: Communication – New Zealand
Figure B4: Communication – United Kingdom
Same-day increase in standard deviation – variance equation
Figure B4: Communication – United Kingdom
Figure B5: Communication – United States
Same-day increase in standard deviation – variance equation
Figure B5: Communication – United States

Footnote

The model specification for the panel of economies allows for a different constant for each economy, while all other variables are pooled. [19]