The Information Content of News Announcements

This paper investigates high frequency movements of the yield curve around macroeconomic announcements by combining event studies and a no-arbitrage affine term structure model in a new Keynesian model with partial (or imperfect) information. I show that the model fits bond yields and macroeconomic announcement surprises well. The model can fit the empirical responses of bond yields to surprises and the standard deviations of the bond yields around the announcement days. The decomposition of long term nominal zero coupon bond yields shows that the high frequency variation in the long term bond yields is due to a combination of changes in the term premium and revisions to expected short rates. In particular, changes in term premia are as volatile as revisions to expected future short rates. The model estimates imply that around macroeconomic announcement days, average expected short rates and term premia are correlated around announcements. I show that the model implied term premium estimates are strongly correlated with estimates of different reduced form models. The model implies that the behavior of the long term rates in the conundrum period can be explained by a lower term premium. I show that most announcement responses of bond yields are due to changes in the expectations about the output gap