Mukesh Chaudhry

Do macroeconomics news releases affect gold and silver prices

Abstract Using intraday data, we document the responses of gold and silver future prices to monthly macroeconomic news releases. Both metals respond strongly to the release of Capacity Utilization. Gold also responds strongly to the release of the CPI. We also find that the release of the Unemployment Rate affects both gold and silver, whereas the Gross Domestic Product and PPI have significant effects on gold. Weak responses by gold to the release of the Federal Deficit and silver to the release of the CPI, Hourly Wages, Business Inventories, and Construction spending are also noted. Keywords: Macroeconomic news; Metals; Volatility JEL classification: G12; G14

Coskewness and cokurtosis in futures markets

Abstract The contribution of the third and fourth moments in explaining the return-generating process in futures markets remains unresolved. This study attempts to resolve this issue by using a four-moment model and by sampling 28 futures contracts and nine market proxies. Such sampling provides wide representation of futures markets and lends a high degree of robustness to the results. Our results show that the second, third and fourth moments are all important in explaining futures returns. Evidence from regression tests show increases in explanatory power as the third and fourth moments are included. The results are robust to the market proxy used.

Stationarity and Cointegration in Systems with Real Estate and Financial Assets

This study examines the properties of wealth indices for investments in several asset classes (real estate, stocks, bonds, and Treasury bills), for several types of real estate (office, retail, research and development office, and warehouse), and by region (East, Midwest, South, and West). The series representing the value of investments in real estate and financial assets are not stationary; therefore, ordinary statistical procedures cannot be applied. Since many of the properties that are included in the real estate series have outside appraisals on an annual basis, especially in the fourth quarter, the real estate series may show seasonal influences. Hence, the appropriate test for cointegration is the Johansens test, which is formulated in such a way as to allow for deterministic seasonality by the inclusion of seasonal dummy variables. The finding of cointegration implies that there is a long-run relationship between the series in the cointegrated system. When the CPI (or a proxy for inflation) is included in the three systems, the number of common factors increase to two, implying that inflation plays an important role in creating a linkage between these time series. These findings also have implications for developing portfolios comprising financial assets and real estate. The findings also have implications for developing a model to forecast real estate prices.

The risk of foreign currency contingent claims at US commercial banks

This study investigates the relationship between market-based measures of risk and foreign currency contingent claims activity at US commercial banks. Specifically, four types of foreign currency contingent claims are examined: purchased foreign currency option contracts, foreign-exchange swaps, commitments to purchase foreign currency and forward contracts. Within the context of the Comptroller of the Currency’s (OCC’s) Banking Circular 277, we diAerentiate between the risk exposure of dealer banks and non-dealer banks. Empirical results suggest that (i) the use of options tends to increase all market-based measures of bank risk, (ii) swaps are used primarily for risk-control purposes and (iii) the use of forward contracts and currency commitments contributes mildly, if at all, to any type of risk. There is some evidence that swaps activity at dealer banks increases unsystematic risk. Otherwise, dealer and non-dealer banks appear to similarly manage foreign currency risk. ” 2000 Elsevier Science B.V. All rights reserved. JEL classification: G21

The influence of macroeconomic news on term and quality spreads

Abstract The role of macroeconomic news on interest rates and yield spreads are of great interest to market observers and policy makers alike. The study investigates the impact of U.S. macroeconomic surprises on the daily market yields of seven debt-market instruments. In addition, various measures of term and quality spreads are constructed in order to ascertain their response to economic surprises. Several important results are documented. First, of the 23 types of ‘news’ release announcements, 17 of them have a significant influence on interest rate changes. Second, changes in the Treasury yields and the corporate bond yield are positively impacted by surprises in the CPI and non-farm payroll figures. Third, movements in the prime interest rate, which is one of the base rates used by banks to price short-term business loans, is positively influenced by an unexpected increase in business activity. Fourth, the Fed funds rate is found to be an important driving variable in the interest rate system. Changes in the Fed funds rate significantly influences every other security in the system, with the exception of corporate bonds, but is itself largely insulated from the movement in yields of other securities. Finally, the study finds several sources of news that impact the term and quality spread measures. Interestingly, news that would encourage economic agents to revise their inflationary expectations upward have a positive influence on the term spread, but on the other hand, they are seen to narrow the quality spread. In general, the results are in accordance with the major theories of interest rate behavior and determination.

The Effects of Unanticipated Macroeconomic News on Debt Markets

We examine the effects of unanticipated macroeconomic news on two interest rate futures using intraday data. The surprises are identified on the basis of their potential effects on debt markets (positive or negative) and by their size (large, medium, or small). The results show distinct ex-post return patterns associated with different categories of news surprises. For example, large surprises have the strongest immediate effects whereas negative surprises have the longest persisting effects. Tests that examine the separate effects of each announcement suggest that debt responses vary with the size and potential effect of the news surprise in each announcement. 2003 The Southern Finance Association and the Southwestern Finance Association.

Currency futures, news releases, and uncertainty resolution

Abstract The effects of domestic macroeconomic news releases on futures on the British Pound (BP), Canadian Dollar (CD), Deutsche Mark (DM), Japanese Yen (JY), and Swiss Franc (SF) are examined. The results show that all five futures respond to the release of macroeconomic news, especially the first set of news releases issued at 7:30 a.m. (CST). Results of tests that identify the effects of individual announcements suggest that news in the Employment Report, the Trade Deficit, Industrial Production, and Capacity Utilization affects all five futures. Other announcements do not have such widespread effects. Volatility increases following the announcements persist for some time. Such increases are not uniform across the five instruments. For instance, following the 7:30-a.m. announcements, for the JY, BP, and SF, higher variance is observed for 30 min. However, for the DM and CD, the increase is 45 and 15 min, respectively.

Price Discovery in Strategically Linked Markets: The TED Spread and its Constituents

The TED (Treasury over Eurodollar) spread between T-bill and Eurodollar futures is one relationships among interest rate contracts that is most actively watched by traders. The Eurodollar future is the more liquid market, but as the anchor of the default-free U.S. Treasury yield curve, the T-bill rate is one of the fundamental financial variables in our economy. This article looks at the behavior of the TED spread from minute to minute, to determine whether the two futures markets are cointegrated (they are) and which way information flows. While the liquid Eurodollar contract does make most of the adjustment when the spread becomes unusually wide or narrow, each market is found to transmit information to the other one, with large changes in the spread creating increased short-run correlation between them.

The impact of inflationary news on money market yields and volatilities

This study investigates the impact of surprises in hourly wages, non-farm payroll, unemployment rate, and producer price index on the yields and volatilities of money market securities. The methodology is conducted in a framework that preserves the strong substitutability among the instruments. We find first the short-term interest rate nexus is inherently a steady state long-run phenomenon. Second, yield variability is fundamentally linked to the release of macroeconomic news that conveys important information on inflation. Third, results from the equality of variance tests suggest that volatilities on announcement days are significantly higher than non-announcement day volatilities across all securities.

Determinants of Treasury-LIBOR Swap Spreads

Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap markets response to higher default risk seems to be higher spread between the bid and offer rates.