The Macroeconomic Announcement Spillover Effect on Bond Market – A Case

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THE MACROECONOMIC ANNOUNCEMENT SPILLOVER EFFECT 42

TheMacroeconomic Announcement Spillover Effect on Bond Market – A CaseStudy of European Corporate Bond Index and Nordic Government BondMarkets&quotNameInstitution TABLE OF CONTENT

ABSTRACT 4

1.0.CHAPTER ONE 5

INTRODUCTION 5

1.1. Background to the Study 5

1.2.Theoretical Framework 6

1.3. Research Hypothesis 8

1.4. Statement of the Problem 8

1.6. Research Questions 9

2.0. CHAPTER TWO 10

LITERATURE REVIEW 10

2.1. Introduction 10

2.2. How Macro Economic News Impacts Assets Prices 10

2.2.1 Macroeconomic News and Asset Prices 10

2.2.2 Effects of the Macroeconomic Announcements on Stock Market 11

2.2.3 Time Variation and Macroeconomic News 12

2.2.4 Importance of the International Macroeconomic News on Prices of Bonds 13

2.2.5. A relationship Between the Prices of the Assets and Benchmark Term Structure of Interest Rate 14

3.0. CHAPTER THREE 17

RESEARCH DATA 17

3.1. Introduction 17

3.2. Corporate Bond Index 17

3.3. Bond Yield Data 17

3.4. Frequency of Bond Yield Data 17

3.5. Term Structure of interest rate of the benchmark 18

3.6. Macroeconomic Announcements data 18

3.7. Variables Summary 18

4.0. CHAPTER FOUR 20

METHODOLOGY 20

4.1. Introduction 20

4.2. Research Design 20

4.3. Sample and Sampling Techniques 21

4.4. Research Data and Data Collection 21

4.5. Data Analysis 22

5.0. RESULTS AND DISCUSSION 24

5.1. Introduction 24

5.2. OLS Regression Findings 24

5.3. Impact of Macroeconomic News Releases on Bond Yields 25

5.4. Impact of the Benchmark Term Structure on Bond Yields 26

5.5. Comparison between foreign (U.S.A.) Macroeconomic News and European Countries’ News 26

5.6. Macro-economic announcement that affects bonds yields most 28

6.0. CHAPTER SIX 30

6.1.CONCLUSION 30

7.0. References 31

8.0. Appendices 36

ABSTRACT

The objective of this studyis to evaluate the market responses of daily yield of Nordic(Denmark, Norway, Finland, and Sweden) government bonds. By using 23types of international and regional macroeconomic news, the studyfound out that macroeconomic news have a great impact in the bondyields of these countries. The results shows that macroeconomic newsfrom USA have a greater impact the bond yields from the Nordiccountries relative to news from European countries.&nbsp1.0. CHAPTER ONEINTRODUCTION1.1. Background to the Study

The advent of the new information affects the prices of the assets.This is one of the conventional tenets of the modern finance theorythat has laid the ground for a rich literature examining the roleplayed by information in the financial markets. One category of theliterature looks at the effects of the macroeconomic announcements ondifferent markets including currencies, equities and bonds (Alti &ampTetlock, 2014). Over the years, the macroeconomic data announcementshave often been used to assess the efficiency of the market and testthe rational expectation hypothesis. In the recent years,macroeconomic data announcements have been used to examine financialmarkets’ microstructure and the role of the private information inassets prices formation. Findings from these studies reinforce theidea that macroeconomic data announcements have a major effect on thefinancial markets, even though the magnitude of the impact varieswidely across announcements and markets. The extent and direction ofthe effect are ambiguous and depends on surprise content in theannouncement and degree of uncertainty prevailing in the market,amongst other things. The evaluation of the market co-movement ofvarious assets immediately before, during and after the announcementssends light about the process of price discovery. News reporttouching on fundamental values of the asset triggers a search in themarket for a new equilibrium value. The search process is carried outthrough the markets interaction between sellers and buyers and theoperational characteristics dominant in the marketplace (Croce,2014).

The behaviors of the traders and market microstructure determine theeffectiveness of this process in various ways. On addition, thearrival of any new and vital information may lead to an interruptionin the course of discovering the price of the asset. As many buyersand sellers try to measure the direction and the magnitude of the newinformation item in determining the value of the financial securitythey trigger a market process that leads to the change in value andyields of various assets. This means that assessing the magnitude ofthe macroeconomic data announcements is paramount in practical andtheoretical investment strategies. Some of the economic announcementsthat have varying level of effect on asset pricing include riskpremia, payroll employment reports and inflation, exchanges rates andprices of the assets. The consequences of this economic news aremeasured within a window covering a particular period such as hours,or minutes following the release of the economic data. In othertimes, these consequences are assessed concerning the predictions ofthe underlying models that containing interest parity. When effectsof macroeconomic announcements are looked at in light of these kindsof models, they are viewed as guiding the way in which the marketparticipants look at the future interest rate path conditioned on theupdated views of the trajectories of the output gap and inflation. Inthe international milieus, the economic announcements inform relativetrajectories of asset yields across various countries as well asreporting risk premia and exchange rates (Lai, Ng &amp Zhang, 2014).

Tymoigne (2008) observed that macroeconomic news changes theinterests’ rates in the bond markets along the yield curve becausethe participants in the market adjust their view about the prospectand a state of the economy, and give their expectations concerningthe behavior of monetary policy following such news. Ederington andLee (1993) considered public news releases as a major source of plansfor the volatility of Treasury bond. Borrowing by the governments andthe cost of this debt (yields on government bonds) is one of the mostdiscussed topics around the world and has gained even more focus inthe recent past partly due to recent Euro financial crisis. Botheconomic news and analysts reports seem to have given more attentionto changes in significant macroeconomic announcements and policyrates. For this reason, this study endeavors to elucidate in somepart the way in which corporate bond yields and government bondbehave following the macroeconomic news release. The guiding purposeof this study is to look at the market responses of daily yields ofthe Nordic government bond. The study will also look at the responsesof the main European investment-grade corporate bond index to a widerange of significant macroeconomic news of various selected Europeancountries and US.

In the study large and comprehensive international macroeconomic newsand bond yields has been employed. This enables the study to find anysubstantial relationships that cross-cut between bond yields and newsannouncements. Using an extensive macroeconomic news datasetfacilitates differentiation between the contemporaneous announcementsand helps to establish the kind of the announcement that has a majoreffect on the bond yields and the sign of bond yield response to thenews.

The reason for including a corporate bond index in the study is toassess whether the effect that the bond yields get from themacroeconomic news has a different behavior between default-freegovernment bonds and credit risk instruments. On top of this, thisstudy partly looks at the relationship between Nordic government bondyields and default-free benchmark yields and the perception of themarket to the default risk in the yields of European corporate bondindex through taking control of the structure of interest rates ofGermany during the days of the economic news release. Increasedinterest and attention on macroeconomic news’ changes are due tothe common belief that these factors may affect the market returnssuch as stock returns and interest rates. In spite of the increasedattention on these issues, policymakers and academicians lack a fulland adequate understanding of those variables which influence assetsreturns in the Nordic market.

The findings of the study are of fundamental importance because debtas an asset class has large magnitude from the perspective of theinvestor and thus results in the behavior of the bond yields willhelp to inform these investors. On addition, to this, the result willhave paramount Implications for the investment companies and theirrisk management aspects especially those businesses that haveinvested in the Nordic governments and corporate bonds. Theinformation is also vital to the investment portfolio managers as itwill help them in allocating fund in such a way that it optimizes therisk and return on the held securities. In addition to this, thefindings of this study are helpful in parameterizing the pricingmodels for those instruments that are sensitive to credit, such ascredit default swaps and corporate bonds

1.3 Research Hypothesis

This study is carried out under the epistemological philosophy that:

There is a significant relationship between the macroeconomic newsrelease and the European corporate bond and Nordic corporate bondyields and between changes in the bond spread and the changes inslope and level of benchmark German government term structure.

1.4. Statement of the Problem

The majority of current studies focus on a limited number of themacroeconomic announcements. Specifically, most of these studies lookat only one event (the effect of the monetary policy announcements onreturns of the assets). However, when there are various significantnews releases around the same time frame, looking at only one event(monetary policy) or only a couple of the announcements may lead tothe biases of the estimated coefficients. This can explain the poorperformance of the macroeconomic announcements documented inexplaining the returns on the assets. Ones, et al., (2005) is one ofthe few studies that have tried to be more comprehensive in its useof macroeconomic news data, where it uses about 17 macroeconomic newsreleases from the U.S.A. This study uses 23 types of macroeconomicnew releases, from different countries (U.S., Germany, U.K., andFrance). The news helps to eliminate biases caused by macroeconomicsindicators

The focus of this study is the aggregate effect of macroeconomicnews, as opposed to individual contributions of each news release.Previous studies give more emphasis on local macroeconomic dataannouncements and neglects international news. However, bond marketand the financial market in totality react also to the foreignmacroeconomic news, given the extent to which the advancement intechnology has linked the global markets. To my knowledge, thereexist only a few previous studies that have endeavored to integrateforeign macroeconomic announcements in their analysis one of thestudies that have tried to look at both international and localmacroeconomic news effects is Nikkinen and Sahlström (2004).Nikkinen and Sahlström (2004) examined the relative importance ofthe Foreign (U.S.) and domestic macroeconomic news in Germany andFinland equity and debt market. The findings reveal that the U.S.macroeconomic news (foreign) has an influence in European debt marketat the time when the domestic news seems insignificant. In fillingthis gap, this study will use both foreign (U.S.) and local(European) macroeconomic news. This will help to reflect the impactof all change drivers in the corporate and government bond yields.

Current literature offers various vital insights concerning theimpact of macroeconomic data announcements on asset prices andexpectations on monetary policy. In spite of this, one puzzlingfeature of this literature is that there are quite small estimatedresponses. Most of these studies have found out that criticaleconomic news, when taken together, account for a subtle level ofchanges in the prices of the assets (even those that are closelylinked to the near-term policy expectations). This study observesthat the existing apparent detachment arises partly from thechallenges connected to measuring the macroeconomic announcements.For this reason, this study uses tow econometric approaches whichfacilitate measuring the noise in the surprises of the measured data.Using this approach, the study hypothesizes that the expectations andyields of the assets are relatively more response to themacroeconomic news releases that the current literature has revealed.On addition to this, the results of the study seek to make aclarification about the set of factors which should be considered byevery model that tries to understand the relationship existingbetween macroeconomic data and the asset prices.

1.6. Research Questions

This study seeks to answer the following questions

  1. Does macroeconomic news release have any spillover effect to the daily European-wide corporate bond index and Nordic government bond yields?

  2. Does any macroeconomic news release give rise to any substantial differences in impacts on the bond yields between risks bearing corporate bond yields and the risk-free government bonds yields?

  3. What kind of macroeconomic news has the most significant effect on the corporate and government bonds yield?

  4. Between European and USA macroeconomic news, which on has the most impact on the returns of the European corporate bond index and a Nordic government bond?

2.0. CHAPTER TWOLITERATURE REVIEW2.1. Introduction

This segment evaluates various studies that have been carried out toinvestigate macroeconomic news on different assets. The studycommences by looking at the effects that macroeconomic news has onthe asset prices, such as bonds and stock. Then the study looks atthe time variation and the macroeconomic news. The segment concludesby giving a summary of the main idea in the study.

2.2. How Macro Economic NewsImpacts Assets Prices

Harris (1987) and Clarke (1973) proposed MDH (Mixture of DistributionHypothesis) which can help to explain the existing positiveautocorrelation between the macroeconomic news release and the priceand returns of the assets. The theory makes an assumption thatchanges in individual prices and the size of trades have aninstantaneous response to any information. Volume and volatility ofthe assets are jointly distributed as a time function depending onthe data arrival rate. As such, according to the theory, if the newsarrives in the market in forms of clusters, the financial marketswould be expected to show a positive auto-correlated volatility.Mitchell and Mulherin (1994) suggest various news items that arereported for a given period which can have a significant impactsmeasure. He further found out that most of the macroeconomic news isgiven out once each month, however, there is the likelihood thatpolicy makers can have a delayed reacts to the news. The study didnot find any evidence to support the idea that the targeted changesby the government are likely to occur on some days or some specificdays following the announcements days. According to the study, if thepublic news plays a critical role in determining the events in thebond market it would be expected that conditional volatility willpositively correlate immediately after the announcement.

Copeland (1976) suggested sequential information model (SIM) makingassumptions that the market participants, usually not to get any newannouncement simultaneously, and it is this varying level ofinformation which the market participants have that generates volume.When looking at the macroeconomic announcements, the news is madeavailable to the public immediately, but the effect of the news maynot be. When the announcement reaches the market, various tradepractices happen which represents various incomplete equilibrium.After all the Market participants get the information, the marketwill arrive at a new equilibrium. As such, according to the SIMtheory, there is a higher trade volume of various assets followingthe release of the announcement and a high autocorrelation structurefor volume and volatility.

A market is made up of both informed and uninformed participants(traders). Each of these traders receives new information withvarying quality and precision. Those traders that are informed revealthe private information they have by trading, and all the otheroperators mainly align their prospects about the price on pasttrades. The assets prices alone do not have full information. This isdifferent to the SIM theory limitations that uninformed traders arenot in a position to deduce signals of the new data from the actionsof the informed traders. In the situation of noisy prices that failsto reflect all the information to the dealers, usually the consensusprice that the market converges at is small, and hence, volatilityand volume remain even the new information does not arrive.

He and Wang’s (1995) developed a model, which stipulates that afterreceiving the information, informed investors engage in a trade forseveral rounds. In the model established by Brock and LeBaron’s(1995), learning and having new information produces a positivelyauto correlated volatility given that the fundamentals follow therandom walk. This set of research suggests that the degree ofprecision of the information signal and the probability trades makinga profit from the private information is dependent on the extent towhich the information is used. Thus, the persistence of tradingvolume and volatility will be low, and the new equilibrium will beattained faster.

Kim and Verrecchia (1991) looked at the way in which the anticipatingfor the expected public announcement impacts on the reaction on themarket to that forthcoming news. During the pre-announcement period,market participants trade using common prior beliefs and methodtogether with private signals applying varying precision levels. Thepublic news forced the traders to revise their expectations creatingan incentive for them to get private information endogenously. Thestudy concludes that information asymmetry in the market is usuallygreater when there is imperfect disclosure anticipation than whenthere is an anticipation of either no announcement or perfectionannouncement. Kim and Verrecchia (1991) further pointed out thatasset’s price variance in greater when there is a more preciseannouncement.

On addition, when there is a low average pre-announcement acquisitionprecision, there will be a stronger price reaction during thedisclosure time. The study reinforces the notion that the variationasset`s price reflects the change in the investors believes as aresult of the new information arrival, and the volume arises becauseof the revision of differential thinking. Kim and Verrecchia (1991)observed that the different types of the announcements bring aboutvarying market reaction magnitude.

Standard macroeconomic theory considers fundamentals of thegovernment bonds and known cash flows to have a close relation withthe inflation and state of the economy. First, the rate of maturityis looked at by Fisher decomposition theory as the sum of expectedinflation and real rate components. This means that any news releasethat leads to the revision of the two components or one of them willcause yields changes. Second, the bond rates are considered or lookedat as embodying the expectations in the market of the futureshort-term rates, and specifically for the rates of federal funds.According to the term structure interest rates, the hypothesis ofthe-the bonds` rates always reflects the expected and the currentfuture trail of the short-term rates, above the holding period of thebond as well as a risk premium.

Even though data do not support this simplified version of theexpectation hypothesis, the bond rates are usually forward-looking,and as such, they are the embodiment of the future monetary policycourse. In turn, these expectations are conditioned by the way inwhich government’s currents out its monetary policy and the way inwhich it communicates its strategy, and thus depends on the policyprocess’ transparency. This has resulted in an increase inpredictability of the near-term actions of the monetary policy.

Poole and Rasche (2003) suggested that this observation means thatgovernments have to act following the rules that are understood bythe financial market. As such according to Evans (1998) thesystematic behavior of central banks such as U.S.A. FED can bedescribed well using the Taylor rules where there should increase ordecrease the government fund when the real GDP is below or above itstrend level and the inflation is either below or above the desiredlevel.

2.2.1 Macroeconomic News andAsset Prices

Over the years, empirical studies have looked at the effect of themacroeconomic news on the prices of various assets. From the early1980s, there has been established movement of the asset price whichfollows the macroeconomics news announcements. This information actsas a vital guidance in developing economic policies and shapingprivate and public sectors expectations. Analysis closely follows themarket reactions, and there exist an extensive literature thatdocuments the results of different markets to the release of themacroeconomic news. Sufficient evidence has been gathered alluding tothe fact that monetary policy and macroeconomic news plays a criticalrole in determining the prices and returns from various assets. Forexample, in 1998, Thornton found out that the movement of interestrates reflects the changes in the monetary policy. On addition tothis, he pointed out that price of an asset and the prevailinginterest rate factors in expectations and views of participants aboutefficiency and reliability of making a monetary decision.

Fleming and Remolona (1999) observed that participants in the marketadjust their views concerning economic prospects in line with themacroeconomic news. That affects the interest along the yield curvein the bond and money markets. On top of interest rates and bond andstock markets. Foreign exchange has been found for having a strongresponse to the macroeconomics news release. For example, Andersen etal., (2003) carried out a study to investigate whether themacroeconomic news has any major effect on the foreign policy. Theresearch found out that foreign exchange is very volatile, and itsvolatility is to a large extent determined by the magnitude of themacroeconomic news and how it affects the expectations of peopleabout the future.

Love and Payne (2008) used the intraday data from the Treasury bondmarket in the USA to investigate the impacts of macroeconomic news ofvolumes and yields of trading. The study found out that macroeconomicnews releases, (which were measured by the surprises) have asignificant impact on the price of at least one of the instrumentsoffered by the government such as bond and T-bills. The study alsofound out that the effect of the macroeconomic news of the instrumentdepends on its maturity. According to Birz and Lott (2011), someinstruments in the financial markets are more affected by themacroeconomic news release than others. In a study of the effects ofmacroeconomic news on various devices in Japan and European financialmarket, they found out that the prices of the government issuedinstruments such as bonds and T-bills are more affected by themonetary policies. On the other hand, instruments that are issued byprivate sector such as stocks are affected mainly by othermacroeconomic policies. For example, a stock market would be moreresponsible to the changes in regulations than the bond market. Thechanges are caused by investors feeling that the government issuedinstruments are more secure than those issued by companies.

Various studies have evaluated the effect of macroeconomics factors,on corporate and government yield. Tully and Lucey, 2007) found outthat some global factors have the vital explanatory power of changesin the spreads of bond yield while the local factors usually havenone or less explanatory power. Basistha and Kurov, (2008) carriedout a study to evaluate the extent to which Germany intraday bondyields respond to the major macroeconomic news and the monetaryissued by ECB. They found out that Germany bond market reactsstrongly in response to the US macroeconomic news compared to thenational and aggravated euro area and UK news. The findings alsorevealed that these phenomenon increase over the years.

Goyenko and Ukhov (2009) carried out research to evaluate thespill-over effect of the monetary policy as opposed to the effects ofmacroeconomics news on the yields on the bonds. They found out thatreturns on the bonds have a more reaction to the domestic monetarypolicy surprise as opposed to the foreign policies. On additional tothis, they reported the existence of a definite difference betweensurprises from domestic monetary policy on the returns of Germanybonds about the UK. When there is unexpected monetary tightening inGermany, the bonds returns rise as opposed to the UK where the bondsyield to fall. This behaviour was explained as caused by theinflation expectations and the existing differences between the twocountries in the credibility of the monetary decision makers invarious countries. Most of the past studies that have tried to lookat the monetary policy and macroeconomic news effects on differentassets have focused on Germany and US government bonds yields. Thisis because there exist a high level of intraday data of the bondyields and prices from the Germany and US government bond futuresmarket. This information is not readily available in the developingeconomies and some regions such as Nordic countries.

Balli (2009) found out that there is a significant relation betweeneuro bonds markets and the global shocks in various levels whichcreates differences in bond yields. Macroeconomic news affects theexpectations of people about the future. For example, recently, thenews on Britain moving out of the Europe caused a great panic in theglobal financial markets. The news lead not only to lower yields andvalue of various assets but it also resulted in a bad performance inSterling pound and other currencies such as Euro. The news caused acontagion effect in the financial market and asset prices that werefelt beyond the European economic zone top the regions such as Asia,and the USA. This is closely linked to European regarding trade andpolitic, and the magnitude of this kind of news was profoundly feltin global financial markets. According to Kilian (2008) bonds arerelatively irresponsive to the news release but once the yields onbonds are affected, the effect is passed down to the returns on otherinvestments such as mutual funds, stocks, and returns on fixeddeposits. As such, the macroeconomics news that has an effect on thebond yields usually leads to a contagion effect that is transferredto various assets that are traded in the economy and even outside theeconomy. As such according to Beber and Brandt (2009) macroeconomicnews release are key controlling factors when it comes to determiningthe value, prices and the yields of various instruments especiallygovernment issued bonds and T-bills.

Numerous incidents have in the recent years the nature and structureof the stock markets. Some of these events are 2008/2009 the globalfinancial crisis, Greece sovereignty debt crisis, European financialcrises, and the modern Britain exit from Euro economic zone. Theworld financial crises stemming from a real estate in the USA lead tothe crash of the global stock markets, during the period variousmarkets indices such as FTSE 100, S&ampP 500, and Australian, allshares index, fell by more than 30%. During the announcements of theGreece sovereignty debt crises and the European debt crises, globalstock markets suffered from Chinese stock market bearing much bluntof the effects. In China, the government had to announce socialmeasures to prevent the stock market from collapsing. The governmenthad to give stimulus fund and issue regulations on sales and purchaseof shares to prevent the stock market from collapsing. In the recenttime announcement on the intentions of Britain to exit from theEuropean market lead to a great shock in the global stock market. Forexample, on the announcement day, FTSE fell by 9.63%. This recentevent eludes to the fact that macroeconomic news release especiallyfrom countries that are in an economic or trade block.

McQueen and Roley (1993) investigated macroeconomic news relation tothe stock returns. They found out that monetary policy announcementsand macroeconomic news affect stock prices because they giveinformation about factors that affect values of the share prices. InNarayanan et, al., (2007) carried out research to evaluate the effectof macroeconomic news announcements on various stock market indicesusing the GARCH model. Any macroeconomic news was considered a riskfactor which affected either return on assets is lead to conditionalvolatility. The study results indicate that the measures of inflationsuch as CPI affect the stock returns level only. On addition to this,they found out that unemployment, balance of trade and housingstarts, has an impact on the conditional volatility returns only. Thefindings were reinforced by Bomfim (2003) who looked at the effectsof the monetary policy news on the stock returns volatility. Theyfound out that surprise monetary policy decision increased thesignificant instability of the stocks in the short run. This meansthat surprises tend to have larger effects on the volatility of thereturns compared to negative sign surprises.

Kurov (2010) evaluated the effect of the FTSE, S&ampP 500 and Japanall shares stock index to the macroeconomic news regarding prices ofoil. The study tried to measure the magnitude of the news by theextent to which they were given publicity through the mainstreammedia. Each news magnitude was rated on a scale of 1 to 5, with fivebeen the news of the highest magnitude. The study found out that somenews such as failure by the OPEC countries to agree on the prices ofoil had a significant effect on the performance of stocks in theglobal markets. However, news that had lower magnitude had lessimpact on the process and returns of the indices under evaluation. Assuch, the study concluded that in as much as the macroeconomic newshave a bearing on the share prices, the mainstream media plays acritical role in determining the extent to which the executions ofpeople will be shaped. Some macroeconomic news that has a potentialof affecting the economy in a major way, but were given lowerpublicity were found to have less or no effect on the returns spreadof the stock market.

2.2.3 Time Variation andMacroeconomic News

There exist current studies that provide many explanations whymacroeconomic new effect can change with economic conditions orbusiness cycle. Some of these studies are Ehrmann and Fratzscher 2005and David 1997. Andersen et al. (2007) looked at the effect ofmacroeconomic factors on various business cycles. They argued thatthe variation in time of macroeconomic news announcements can takeplace due to many reasons, of which they identified three that wereconsidered to be of great importance. First, macroeconomic news canhave an unusual behavior during varying business cycle times. Forexample, there was a fall in employment data in early 2004when therewas a growing concern that the employment could not recover. Thisincreased the market attention to the monthly U.S. nonfarm newsannouncements on payroll unemployment.

Second, policymakers can prefer some macroeconomic indicators(announcements) when making various policy decisions. This can bereflected in increased effects in the financial returns to some ofthese announcements. Third, they assumed that different reactions inthe market rely on the state of the business cycle. For instance,when a change in economic activity is expected but the downturn orextent of its importance is unknown, some of the ford-lookingmacroeconomic news might have led to an increase in the importance ofthe market participants. Andersson et al. (2009) looked at differentmonetary policy regimes, in evaluating the German long-term bondmarkets. Their research concentrates on the time in which euro wasintroduced. They created three types of monetary policy regimes, thatis, accommodative, tightening, and neutral. The result of the studyindicated that effect of public information on the German bond hadincreased over time. In 2007, Faust et al. evaluated the effect ofvarious USA macroeconomic announcements on the interest rates andexchange rates. They found out that there is a little evidence of thetime-variation in the impacts. This means that there exist asubstantial consistency in the effects various key macroeconomicannouncements.

2.2.4 Importance of theInternational Macroeconomic News on Prices of Bonds

International macroeconomic news on the bond prices plays a criticalrole in determining the prices of bonds. The macroeconomic news maypositively or negatively influence the price of bonds. Suchannouncement plays a significant role in forecasting the performanceof the bond market in the future. It helps investors to understandwhether the future macroeconomic environment will provide an enablingenvironment for the growth of band market. The macroeconomic newsrelease acts as an important signal for how the future bond marketwould be performing. For example, such announcement may serve as adriver of growth that is signified by the US bond market. Suchstatement indicates how markets such as the US would influence othereconomies. Second importance is based on the time difference when themacroeconomic news releases are made. It helps to explain thedifference between the European economy other global economies. Forexample, the US macroeconomic news announcements are published priorany other news release (Chordia, Green, &amp Kottimukkalur, 2016).

Such difference in time of macroeconomic press release between the USand European countries help to come up with significant finding andconclusions regarding the differences in performance of the twoeconomies and world as a whole. Besides, the difference in outcomescaused by such announcement helps to deduce important conclusion andremedy the situation that could cause adverse effects in the economy.It can be observed that the US macroeconomic announcements are madeprior those of European nations. It implies that the findings obtainin the initial announcement may help to ratify the adverse effectsthat may course by such news prior the second macroeconomicannouncements are made. Investors can use the first and secondmacroeconomic announcement to make important investment decisionsregarding their bond portfolio. For instance, such news reports mayhelp investors revise their bond investment portfolio by selectingthose bonds that are likely to perform well (Gilbert, Scotti,Strasser, &amp Vega, 2016).

The other importance of macroeconomic news release is the creation ofan enabling environment where information is readily available to allinvestors, which consequently help them in decision-making. It can beobserved that there is a significant level of interdependence amongdifferent countries. For example, the United States and Europeannations due to globalization making business cycles more integratedtogether. Such announcements tend to cause a significant change inthe business cycles. The changes in business cycles affect bondprices. For example during the recession, the economy tends tocontract due to higher inflation levels. Consequently, the rates ofinterest continue to rise, which in return leads to an adverse impacton bond prices. During the period of economic contraction, bondassures make substantial losses because, during such period, the bondprices tend to fall (Savor, &amp Wilson, 2013).

On the other hand, during recovery and boom economic time, theprices and value of bonds go up. Most investors tend to buy morebonds in anticipation of better returns in the future. The study alsoshows that macroeconomic news announcement plays a significant rolein policy formulation. Policy makers utilize macroeconomic newsrelease to make relevant policies. Policy decision on certain periodsmay derive its basis from the macroeconomic news announcements. Suchpolicies decisions attributable to macroeconomic news release may beobserved from the increase in financial returns. The macroeconomicnews announcements are important because they help to reveal vitalinformation pertaining the determinants of the fundamental value ofthe bonds. Such fundamentals help investors and issuers of bonds tounderstand the performances of such bonds and make meaningfulpredictions in the future (Paiardini, 2014).

The macroeconomic announcements contribute to indicate differentlevels of risk that investors are likely to encounter in the bondmarket. Such indication of possible risk helps investors to put inplace precautionary measures in dealing with such risk. Some of themost common types of risk that macroeconomic news release may help toreveal include political, credit, inflationary risk, as well ascurrency risk. The macroeconomic news may indicate the existence ofpolitical risk, which is more susceptible to affect the originalprices and value of a bond. However, government bonds are believed tocarry an insignificant level of political risk as compared to othertypes of bonds (Chordia, Green, &amp Kottimukkalur, 2016).

The macroeconomic news release may also contain credit risk andinflationary risk, which may consequently affect the demand andsupply of bonds in the market. This is because macroeconomic news canlead to inflation where the prices of good go up following a givenmacroeconomic news. The inflation and credit risk new may help tocaution investors to be aware of the risk so that they can putnecessary measures in place. Also, the macroeconomic news may containinformation on the currency risk. It is clear that the value ofcurrency between different countries may have an adverse impact onprices of bonds. For instance, a bond issued in an economy whosecurrency value is substantially low, it may adversely affect theprice of that bond especially if it the investment involves twodifferent economies where one economy is weak, and the other one isstrong. Therefore, the macroeconomic news is important in assistinginvestors to be cautious at various levels risk contained within themacro news. The macroeconomic news release helps to indicate futuremarket expectations which help bond issuers and investors to know thedifferent investment strategies that may utilize to obtain higherinvestment returns and also avoid some risk (Savor, &amp Wilson,2013).

2.2.5. A relationship Betweenthe Prices of the Assets and Benchmark Term Structure of InterestRate

The relationship between asset prices and benchmark interest ratestend to exist in the senses that it helps to assess the value ofbonds. Usually, the federal government tends to issue treasury billsand bonds to the public whereby, their yields act as an importantsource for benchmarking fixed income securities that have the sametime to maturity. Besides, the relationship between the assetsprices and interest rate benchmark structure exist due to thepresence of the same method of valuing bonds. The term structure ofinterest rates helps to establish the relationship through somepatterns discuss. Some of those patterns include flat, normal, andinverted yield curves. The flat yield curve is where macro businessenvironment tends to send signals that are undefined. Such curveindicates those investors who tend to interpret the moments ininterest rates in different angles.

During such flat yield curve, investors may not be in a position todetermine whether the rates of interest could move in any of theavailable directions. Such curve may be experienced during the timewhen the macroeconomic environment tends to make changes thoseresults in different mixed signals. Besides a flat yield curveindicates that when the long-term rates of interest fall, theshort-term interest rates tend to rise. During such periods investorsmay reap maximum benefits that help their investment return. Theother pattern that contributes to explain the relationship betweenthe asset prices and benchmark term structure of interest is thenormal yield curve (Orphanides, &amp Wei, (2012).

In the normal yield curve, no much changes anticipated by investors.The investors believe that the level of inflation rates will remainnormal, and the economy does not have significant changes that couldaffect interest rates yield on their assets investments. During theperiod of the normal yield curve, investors have higher anticipationsthat bonds and fixed and other instruments that offer fixed incomewill generate higher returns. It implies that investors tend toexpect significantly higher yield from long-term fixed incomesecurities instruments as compared to the short-term asset securityinstruments. In a normal market condition, long-term securityinstruments have a higher risk as compared to short-term incomesecurities because there is a lot of uncertainty that an investor mayexperience in the long run. The same concept of risk applies to theinvestors in the bond market whereby long-term bonds are riskier ascompared to short-term bonds. Inventors of the long bond may not havethe certainty that they will receive back the principal amountinvested in the bonds at the end of investment period. Hence,long-term bond investors should be adequately compensated forinvesting in the long-term bonds which carry higher risk. Suchinvestors may be offset by offering them higher rates of interest ontheir long-term investment (Bansal, Kiku, Shaliastovich, &amp Yaron,2014).

The other pattern that indicates the relationship between the assetprices and benchmark interest rates structure is an inverted yieldcurve. The curve shows changes in interest rates due marketconditions extraordinary conditions in the macroeconomic environment.The curve indicates inverse anticipations by investors in the normalyield curve. It implies that those investors who have made long-terminvestments on bond obtain a lower return. During such time, thematurity period for such bonds tends to be prolonged, and investorsare compensated with a low rate of interest as compared to those inthe shorter investments duration. In an inverted yield curve pattern,investors in the bond market anticipate that the rates of interestwill continue to decline in the future dates which consequently leadsto a decrease in anticipated income of assets investments. Despitehaving an inverted yield curve some investors still prefer investingin long-term instruments knowing that they will get a lower yield.Such investors believe that an investing in a market that has aninverted yield curve is a better way to lock in money and minimizethe prevailing interest rate risk (Kung, 2015).

Other patterns help to explain the relationship between fixed incomeprices and assets and interest rates benchmark structures. Some ofthose other patterns include spreads in credit and the theoreticalspread spot rates. The credit pattern spreads indicate that corporatebonds are riskier as compared to those bonds offered by federalgovernments. Due to lower risk attributed to government bonds, therates of interest that investors receive for compensation of theirinvestments is significantly low as compared to corporate bonds. Thespread yield curve displays a relationship between prices andbenchmark interest rates of a corporate bond. The interest rate termstructure is measured by the overall direction undertaken by theeconomy. For instance, when the economy is experiencing higher ratesof inflation, the rates of credit between corporate and governmentbond declines. Such reduction gives companies an opportunity toborrow at a lower rate of interest. The lower rate of borrowingenables companies to obtain more credit at lower interest rates. Suchcredit allows the businesses to invest and consequently increase thelevels of economic activities which help to expand the economy. Basedon the study it can scrutinize that yield curve are essential toolsthat can be utilized to explain the relationship between the interestrates and benchmark fixed income securities such as bonds. It alsohelps in understanding the correlation between yields, bond yieldsand rates of interest (Wu, &amp Xia, 2016).

The theoretical spot rate curve may be utilized to explain therelationship between the prices and interest rates benchmarkstructure. The theoretical curve focused on the assumption thattreasuries provide varying coupons and may not be in a position topresent properly fixed security incomes. It also asserts that bondthat pays higher coupon rate and has same maturity duration may notbe the best benchmarks for bonds that have higher interest ratesbecause varying results may be obtained. Despite the variation, yieldcurve provide a more accurate reference because it tends to adjust toreflect all the differences in the rates of interest. Also, thebootstrapping method may be used to explain the relationship betweenthe asset prices and interest rate benchmark. The methods help tohelp to equate all fixed income securities that offer zero ratecoupons and have more than one year maturity period (Grasselli, &ampMiglietta, 2016)

2.4. Summary of literature

It can be observed that macroeconomic news release has a significantimpact on the prices and value of the bonds. Empirical researchindicates that macroeconomic news announcements tend to affect thebond yield in different ways. For instance, a macroeconomic newsannouncement that shows that there will be positive prospects in thebond market makes the return on the bond rising. It also stimulatesinvestors to demand long-term bonds with the anticipation of higheryield in the future. Also, a macrocosmic news release may affect themanner in which investments decisions are made because they tend toinfluence the economic business cycles. During the recession, therates of inflation are high which further affects yields on bond in anegative way. On the other hand, during the boom when the economy isperforming well bond yields tend to increase. It can be observed thatthe study has put forth more impacts of macroeconomic newsannouncements as discuss. Also, a variation of such news has been putforth. For instance, there is variation in time between the US andEuropean macroeconomic announcements.

The US tend to release their macroeconomic news prior Europe. Suchtime differences act as a source of variations and tend to affectbond yields. Also, the study has investigated the macroeconomic newsannouncements on stocks. It can be observed that such news affectsthe returns on stocks and also affect investments decisions made bythe investors. The importance of macroeconomic news on bonds hasalso been researched. The study shows that macroeconomic news releasehelps to determine the economic business cycles. They also helpinvestors to forecast how the yields those are likely to be obtainedin the future by investing in the bonds. Macroeconomic news releasecontains vital information on different levels of risk such aspolitical, currency, credit and inflation risk. Such informationaffects bond prices and also helps investors to be careful whenmaking investments to avoid incurring losses. Besides, therelationship between asset prices and interest structure benchmarkhas also been discussed. It can be observed that the relationship hasbeen explained by the various yield curve pattern. 

3.0. CHAPTER THREERESEARCH DATA3.1. Introduction

The study has used a wide range of data. Specifically, variablesutilized in the study are macroeconomic announcements and bondyields. The macroeconomic announcements considered are for the USAand three of the European biggest economies, that is, France, UK, andGermany. To understand the variables better, the following segmentselucidates them starting with corporate bond index and concludes withthe macroeconomic news data.

3.2. Corporate Bond Index

The study uses a subset of BofA Merrill Lynch Index (for a 7-10 yearEuro Corporate Bond Index). The index has Euro corporate bonds withthe maturity period of between seven and ten years. The index acts asthe proxy for the publicly traded Euro denominated corporate bondinstruments issued in either of the Euro member country’s domesticmarket or issued in Eurobond. This index acts as the proxy for theEuro denominated. Qualifying securities have been rated by eitherS&ampP, Moody’s or Fitch ratings. On addition to this securityincluded in the study have fixed coupon schedule and must have aminimum outstanding of more than Euro 250 million. The indexexcludes the defaulted and warrant-bearing securities and legalcurrency. The yields of the index are obtained from Bloomberg dailydatabase. The database used is for the period ranging from 2000 to2011.

3.3. Bond Yield Data

Bond yield database is used as dependent variable in the study. 7-10years corporate bond index is analyzed for changes in yield. Onaddition to this, a 10-year euro-denominated Nordic government bondyields for each of the Nordic countries is looked at and the spreadchanges of the yields over the German 10-year government bond yield.In obtaining the yields from the bond, Bloomberg daily database isused. This study used bond bid yields. The study used longitudinaldesign where historical database for 2000 and year 2010 is used.Closing bid prices are used to calculate daily yield spread anddistributed over the benchmark. Governments bonds and long maturitycorporate bonds are used to remove the short term yield fluctuations.Data used they indicate high yields from corporate bond for a periodbetween 2007 and 2009, possibly due to the global financial crises,which led to a credit crunch. There was a steep yields decline from2009 as the financial crises started to end. The government bond onthe other hand, has a declining trend over the entire period underconsideration.

3.4. Frequency of Bond YieldData

Given that this study looks at the daily bond yields changes as wellas the spread during the macroeconomic news release day, daily returndata is used as opposed to tick-by-tick or intra-day. Compared todeveloped economies such as USA and UK, Nordic government bondintra-day data is relatively unavailable. This is because thecountries do not have high trading volumes of the liquid bond futuremarkets that have available intraday data which is common incountries like the US. Availability of little information about theNordic countries information has led to a low number of studies thathave evaluated the Nordic countries. Scandinavian countries are morelikely to be affected by daily frequency data weakness (where yieldcurve can change due to noise during the day) because the Nordic bondmarkets are less volatile compared to other markets wheremacroeconomic announcements and another type of news spread veryquickly. One key element of using daily yield is that mainly, themacroeconomic announcements are not given out on the official days.There is always a leakage of the macroeconomic news in variouscountries before this news is officially released. This limitation isovercome by using the daily yield data.

3.5. Term Structure ofinterest rate of the benchmark

Term structure of interest rate is the kind of relationship thatexists between the bond interest rates yields and maturity periods.The term structure of interest rates is commonly known as the yieldcurve, which plays a critical role in the bond market. The terminterest rate structure affects investor’s future decisions andexpectations. The study utilized macroeconomic news release to findout the impacts of such news on the Nordic and German bonds interestrates yields (Orphanides, &amp Wei, 2012). Treasury yield curvetends to be taken into consideration as a benchmark of the creditmarket. The curve indicates the yield of risk-free fixed incomesecurities. Usually, yield curve tends to be utilized in differentscenarios. For example, financial institutions use the yield curve asa standard measure for determining the interest rates that they maycharge on borrowings advanced top their customers. Therefore, it isimportant to take into consideration factors that affect yield curve(Doh, 2013).

Some of those factors include macroeconomic risk elements and FederalReserve’s, inflation rates, unemployment levels to among otherfactors. The inflation level must be taken into consideration, propercontrols and regulations should put in place to ensure that yield onbonds is favorable to the investors. Also, the level of unemploymentshould also be in check too and ensure that there are numerous levelsof economic activities in an economy. Such levels help to expand theeconomy and create employment opportunity and consequently improvethe yields on bonds. The study shows that decline levels of economicactivity and falling in inflation rates leads to a flat yield curve.On the other hand, steeped yield curve may be attributed to decreaselevels of economic activity and fall in the inflation levels (Moreno,&amp Platania, 2015).

3.6. MacroeconomicAnnouncements data

The dairy bond price historical data was employed to determinemacroeconomic spillover effects in the Nordic and European Bondmarket. The case study utilized different variables of a large set ofdata that helped to classify of different bonds yields into variouscategories. The data was obtained from the Nordic government bondmarket websites and European bond market. The study employed changesof the daily bond yield for corporate bonds of between seven to tenyears index. The bond of each Nordic country was taken intoconsideration such as Sweden, Finland, Denmark, Norway, and Iceland.Bloomberg data fiancé and yahoo finance were among the principalsources where the data was being acquired. The study utilized longtime daily historical data from first January 2000 to 31st December2010. The closing daily bond yield was used to compute spreads forbenchmark and daily yields spreads. The problem of fluctuations ofdaily yield differentials in bond interest rates was overcome byusing long-term German government corporate bond index. Prior 2010,there was variation in bond yield due to global economic crisis.However, from 2010 the rate of change started declining because theeconomy began to become more stable.

3.7. Variables Summary

The section contains statistical values that were used in theexecution of the actual research. Table 2.1 represents a statisticalsynopsis of the macroeconomic news variables with various elementsunder considerations. In Table 2.1 in the below, column A indicatesstandardized macroeconomic news release while column S representsstandardized surprise news factors. The variables in the followingchart show statistical news of the sample observations. Some of thosevariables include minimum, maximum, standard deviation, mean, andstandard error estimates (S.E).

Based on Table 1.2 above it can be observed that surprise factors andstandardized macroeconomic news release were utilized in the study.The values in the table show that standard errors for all thevariables under investigation are equal. Also, the standard deviationequals one. Further, it can be observed from the above table thatsurprise factor observations are few in numbers as compared to theanticipated corresponding data obtained from Yahoo Finance andBloomberg. Regressed comparable outcomes were achieved by utilizingboth news surprise factors and observations of the macroeconomic newsannouncements.

Table 1.41 in the appendix indicates a correlation matrix ofthe two regression variables. The correlation matrix above containsthe U.S. macroeconomic consumers’ confidence news and nonfarmUnited Sates Payroll. The two macroeconomic news variables are vitalbecause they help to indicate the yield of bonds.

4.0. CHAPTER FOURMETHODOLOGY4.1. Introduction

Methodology chapter evaluates the methodical factors that are relatedto this study. The segment presents the research approach and design,sampling technique used and the data collection and analysis. Themethodology part is prepared based on various past studies that triedto evaluate effects of macroeconomic news on various securities andassets such as stock, derivatives, and bonds. Some of the importantstudies upon which the methodology is based include Alti &ampTetlock, (2014) and Lai, Ng &amp Zhang, (2014). The segmentcommences by looking at the research design.

4.2. Research Design

Research design entails procedures employed by the researcher toselect research instruments, sample, and process used in collectingand analyzing the data collected. Thus research design comprises ofthe blueprint that outlines what the researcher executed startingfrom the hypothesis/research question formulation to analysis andexecution of data. The study employed quantitative case study as adesign which aided carrying out research on the effect of themacroeconomic announcement on the bond market. The scope of theresearch was on two bond markets namely Nordic government bondmarket and the European Corporate Bond market.

The case study was preferred for this study because it provided anopportunity to obtain comprehensive and in-depth data on the newsannouncements on the specific bond markets discussed. Suchinformation could not have been possible to get using other researchdesigns. Besides, the design was suitable because the researcher wasable to obtain a numerical explanation of the effects of spillovernews and events on the bond yield within the context of the bondmarket. The case study was further preferred because it lackedgeneralization since the framework of the research was based onspecific macroeconomic events that were very specific. Besides, casestudy helped to ensure that high ethical research standards weretaken into consideration because it eliminates generalization.However, the case study research design may be time-consuming andexpensive, but the advantages of using it outweigh its disadvantages(Creswell, 2013).

The case study design helped to investigate macroeconomic events onthe data comprising of 24 pertinent news on macroeconomic events inthe United Kingdom, United States French, and Germany. The Germanten-year bond yield index was used to benchmark performance of Nordiccountries yield on Government bonds. The study mainly focused on thedaily data yield starting from 2000 to 2010. The design utilizedsecondary Data to gather data regarding the impact of macroeconomicnews announcement on the government bonds in European Bond Market andNordic government bond market. The Nordic government bond marketcomprised mainly of the five countries namely Sweden, Norway,Denmark, Iceland, Greenland, and Finland. The quantitative case studywas able to execute a rapid collection of data and provide an insightinto the ability to conceptualize the population under investigationand come up with relevant findings regarding the spillover/ effectsof a macroeconomic new release on the bond market (Denscombe, 2008).

4.3. Sample and SamplingTechniques

Sampling involves the process of selecting representative units ofstudy from the population. Sampling helps to have a fairgeneralization of the outcomes from the chosen population. It alsoallows the research to understand elements of a population bycollecting data from the sample and analyzing that data to come upwith significant finding regarding the population underinvestigation. For example, a sample of 24 macroeconomic news wasselected out of five 48 news release using non-Probability judgmentalsampling.

The sample size is dependent on a number of factors. Some of thosefactors include what the researcher want to know, the purpose ofresearch and availability of resources and time to carry out theresearch. In this case, a sample size of 24 out of 80 macroeconomicnews release was chosen. The 24 news macroeconomic news were selectedto provide an insight into the effects of such news on the yield bondperformance in the European and Nordic bond markets. A sample of 24macroeconomic news release was adequate because it represented 30% ofthe target population. According to Mugenda and Mugenda, 2003 arepresentative sample of 30 percent is justified and appropriate tocollect the necessary data, analyze such data and test the level ofsignificance to obtain valid conclusion about the population(Schreuder, Gregoire, &amp Weyer, 2001).

Non-probability purposive sampling technique was utilized, wherebythe data was collected from the government websites of both Nordiccountries and Europeans bond markets. The non-probability purposivesampling is a technique depends on the judgment of the researcher inthe selection of the units that are to be utilized in carrying outthe study. Purposive sampling is also referred to as selectivejudgmental sampling whereby in this case typical case study samplewas used. The distinct purposive sampling employed in this study wasmaximum variation sampling technique commonly known as aheterogeneous method of sampling it allowed the researcher tocapture a broad range of a macroeconomic news affecting the Nordicand European bond market.

The basic idea behind using maximum variation non-probabilitysampling was to obtain a comprehensive insight from differentperspectives on the effects of the macroeconomic news release on theselected bond markets. It also helped the researcher to identifywhether there are underlying common elements on the macroeconomicnews release on that effects yield on the bond market. Purposivenon-probability sampling was suitable in carrying out this studybecause it can provide the researcher with different justificationpertaining the sample under investigation. It also provides theresearcher with a broad spectrum of the sample and population as awhole which consequently lead to valuable findings (Schreuder,Gregoire, &amp Weyer, 2001).

4.4. Research Data and DataCollection

The research uses quantitative data to evaluate the impact of themacroeconomic news release on the bond yield. Quantitative data areusually expressed and measured in terms of counts or values and aregiven in numbers. The quantitative data used comprise of corporatebond index yield, the frequency of the bond yield data, termstructure of interest rate and macroeconomic news factors. The dataused is secondary obtained from reliable government sites, and bondmarket official sites. Use of reliable sources is meant to ensuredependability, generalizability, and reliability of the findings.

4.5. Data Analysis

The study assesses the impact of macroeconomic announcements on theyields of bonds issued by the Nordic government. The researchemployed the econometric model. The econometric model uses variablescomprising of the changes in the spread of corporate bond index andthe government bonds yield. Spreads are computed over the 10-yearGerman by bond index yield, during the macroeconomic announcementreleases period (in days). The change in spread and yield change issymbolized by ΔSPREADj, i,t and ΔYIELD j, i,trespectively. Calculating yield and spread are carried out from theclosing day’s bid yields of the previous day (t – 1) as well asthe closing day’s bid yield (t).

The German benchmark term structure of the interest rates issymbolized by Yt where (t) is the day of the news release of theyield of the 3-month German Bubill. The slope of the benchmark termstructure is defined using the spread that exists between the 3-mothBubill yield and the 30-year constant maturity yield of the Germanbond. The spread is symbolized by TERMt, which is the spread for thenews release day (t). The study carries out Ordinary least squares(OLS) regressions for the equations 1.0 and 2.0 below are carried outfor every macroeconomic news release as well as surprise factors fromthe news. The regression of the equation is also carried out on thefactors of the term structure of the benchmark government bondthrough the time of the release of the macroeconomic news.

Equation 1.0

Where:

ΔSPREADj, i,t =represent the daily yield change on thecorporate yield or the yield spread on the government bond over theGerman 10-yaer bond yield in the days of the news release.

j=news

i=represent release day

t=represent time

Ksit= represent surprise news factors

ΔTERMt= represent change in German government bond structure

The spread on the government bond yield is for bonds issued byNordic countries (Denmark, Finland, Norway, Sweden and Iceland). α 1and α2 represent the coefficients for the ΔYt (daily level changes)and the ΔTERMt (German government bond structure change), and α0represent the intercept constant, and εt is an error term. Ki isdifferent kinds of macroeconomic news from Europe (France, UK, andGerman) and the USA.

Equation 2.0

Where:

ΔYIELD j, i,t= represent the daily yield change in thecorporate bond index or government bond yield during the day of newsrelease

j=news

i=represent release day

t=represent time

KAit= represent type of macroeconomic news

Ksit= represent surprise news factors

In the data analysis, the two equations are regressed discretely foreach bond index and government bond yields and changes in a spread ofvarious types of the macroeconomic news (KAit) indicatorsthat include surprise news factors (Ksit). Two differentregressions are carried for each macroeconomic news (for each changein the spread and corporate and government bond yield), which includethe surprise (actual fewer expectations) and standardized newsreleases. 230 separate regressions are run (10 spread changes andyield × 23 types of macroeconomic news).

Use of OLS regression as an independent variable in the governmentbond yield and macroeconomic news release as an independent variableare used in previous studies, for example in the study by Anderssonet al. (2009). One difference between Andersson’s study and thisstudy is that the former study used intraday bond price while thelatter uses daily yield data. The OLS regression evaluation iscarried out using SPSS statistical software tool. Andersson et al.(2009) did not use the structure of interest of the government bondas one of their study explaining factor. But government bond termstructure is used in such studies as Duffee (1998) where governmentbond slope and the level was used in the OLS regression in examiningeffects of the variability in bond yield spread over the Treasurybenchmark yields.

5.0. RESULTS AND DISCUSSION5.1. Introduction

This section presents the findings of the data analysis. The resultssought to assess the effect of macroeconomic announcements on spreadand yields of the Nordic government bond markets. The European bondmarkets are also evaluated using the econometric model. On top ofevaluating effects of macroeconomic news from different countriessuch as USA, France and Germany, the findings consider therelationship between the European bond index and Nordic governmentbond yields and the German government interest rates structure. Thechapter commences by evaluating the findings from the OLS regression.

5.2. OLS Regression Findings

The table 1.0 below shows the results of OLS regression estimationfor the daily returns on bond and spread over the German 10-yeargovernment bond return changes over the Nordic countries bonds andthe European corporate bond on the macroeconomic announcements andthe benchmark term structure in the days of announcements.

Table 1.0 OLS Regression Findings

Table 1.0 above represent regression of the findings. It has beengrouped between employment and activity and price depending on theeconomic indicator’s nature. Table 1.0 gives the regressionsfindings for the selected three macroeconomic news. Table 2.0 showsthe regression analysis for all the macroeconomic news (23macroeconomic announcements for the entire period of between the year2000 and 2010).

Table 2.0

Table 2.0

Regression result coefficients

&nbsp

Fin yield

Swe yield

Nor yield

Den yield

Corp yield

Fin spread

Swe spread

Nor spread

Den spread

Corp spread

Activity and employment

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

US nonfarm payroll

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.0019

-0.0051

-0.0091

-0.0070

-0.0013

0.0010

-0.0002

-0.0039

-0.0003

0.0040

Surprise

0.0121

0.0162

0.0184

0.0109

-0.0018

0.0034

0.0037

-0.0013

0.0036

-0.0035

Level

0.2912

0.2711

0.2510

0.2309

0.2108

-0.1907

-0.2108

-0.2309

-0.2510

-0.2711

Slope

0.4176

0.3164

0.2152

0.1140

0.0128

-0.0884

-0.1896

-0.2908

-0.3920

-0.4932

Adj. R2

0.3500

0.2100

0.2160

0.4500

0.2980

0.0720

0.0480

0.0930

0.0530

0.1610

Std.Err.

0.0400

0.0470

0.0480

0.0330

0.0360

0.0120

0.0310

0.0390

0.0190

0.0290

Activity and employment

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

US initial jobless claims

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

0.0020

0.0009

-0.0009

-0.0002

-0.0001

-0.0007

-0.0013

-0.0019

-0.0025

-0.0031

Surprise

0.0027

0.0087

0.0021

0.0081

0.0015

0.0075

0.0009

0.0069

0.0003

-0.0063

Level

0.8716

0.7507

0.6298

0.5089

0.3880

0.2671

0.1462

0.0253

-0.0956

-0.2165

Slope

0.8638

0.7423

0.6208

0.4993

0.3778

0.2563

0.1348

0.0133

-0.1082

-0.2297

Adj. R2

0.9294

0.8616

0.7879

0.7066

0.6147

0.5063

0.3672

0.1153

-0.2152

-2.1235

Std.Err.

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

US unemployment

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.0003

-0.0002

0.0028

0.0021

-0.0007

-0.0007

-0.0013

0.0032

0.0006

0.2615

Surprise

-0.0013

-0.0063

-0.0032

-0.0018

0.0002

-0.0327

-0.2546

-0.0036

-0.0012

-0.0022

Level

0.8153

0.7553

0.7010

0.8124

0.9852

-0.0363

-0.2445

-0.2658

-0.2689

-0.2654

Slope

0.9633

0.7233

0.6325

0.9325

0.7154

-0.0547

-0.2651

-0.3567

-0.2315

-0.2351

Adj. R2

0.7621

0.3652

0.7021

0.5214

0.0412

0.1251

0.1233

0.1524

0.2484

0.2351

Std.Err.

0.8730

0.6043

0.8379

0.7221

0.2030

0.3537

0.3511

0.3904

0.4984

0.4852

GER unemployment

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2375

-0.2407

-0.2447

-0.2426

-0.2369

-0.2346

-0.2358

-0.2395

-0.2359

-0.2316

Surprise

-0.2235

-0.2194

-0.2172

-0.2247

-0.2374

-0.2322

-0.2319

-0.2369

-0.2320

-0.2391

Level

0.0556

0.0355

0.0154

-0.0047

-0.0248

-0.4263

-0.4464

-0.4665

-0.4866

-0.5067

Slope

0.1820

0.0808

-0.0204

-0.1216

-0.2228

-0.3240

-0.4252

-0.5264

-0.6276

-0.7288

Adj. R2

0.1144

-0.0256

-0.0196

0.2144

0.0624

-0.1636

-0.1876

-0.1426

-0.1826

-0.0746

Std.Err.

-0.1956

-0.1886

-0.1876

-0.2026

-0.1996

-0.2236

-0.2046

-0.1966

-0.2166

-0.2066

UK unemployment

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.2336

-0.2347

-0.2365

-0.2358

-0.2357

-0.2363

-0.2369

-0.2375

-0.2381

-0.2387

Level

-0.2329

-0.2269

-0.2335

-0.2275

-0.2341

-0.2281

-0.2347

-0.2287

-0.2353

-0.2419

Slope

0.6360

0.5151

0.3942

0.2733

0.1524

0.0315

-0.0894

-0.2103

-0.3312

-0.4521

Adj. R2

0.6282

0.5067

0.3852

0.2637

0.1422

0.0207

-0.1008

-0.2223

-0.3438

-0.4653

Std.Err.

0.6938

0.6260

0.5523

0.4710

0.3791

0.2707

0.1316

-0.1203

-0.4508

-2.3591

FR unemployment

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.2359

-0.2358

-0.2328

-0.2335

-0.2363

-0.2363

-0.2369

-0.2324

-0.2350

0.0259

Level

-0.2369

-0.2419

-0.2388

-0.2374

-0.2354

-0.2683

-0.4902

-0.2392

-0.2368

-0.2378

Slope

0.5797

0.5197

0.4654

0.5768

0.7496

-0.2719

-0.4801

-0.5014

-0.5045

-0.5010

Adj. R2

0.7277

0.4877

0.3969

0.6969

0.4798

-0.2903

-0.5007

-0.5923

-0.4671

-0.4707

Std.Err.

0.5265

0.1296

0.4665

0.2858

-0.1944

-0.1105

-0.1124

-0.0832

0.0128

-0.0005

US retail sales

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4731

-0.4763

-0.4803

-0.4782

-0.4725

-0.4702

-0.4714

-0.4751

-0.4715

-0.4672

Level

-0.4591

-0.4550

-0.4528

-0.4603

-0.4730

-0.4678

-0.4675

-0.4725

-0.4676

-0.4747

Slope

-0.1800

-0.2001

-0.2202

-0.2403

-0.2604

-0.6619

-0.6820

-0.7021

-0.7222

-0.7423

Adj. R2

-0.0536

-0.1548

-0.2560

-0.3572

-0.4584

-0.5596

-0.6608

-0.7620

-0.8632

-0.9644

Std.Err.

-0.1212

-0.2612

-0.2552

-0.0212

-0.1732

-0.3992

-0.4232

-0.3782

-0.4182

-0.3102

US durable goods orders

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.4692

-0.4703

-0.4721

-0.4714

-0.4713

-0.4719

-0.4725

-0.4731

-0.4737

-0.4743

Slope

-0.4685

-0.4625

-0.4691

-0.4631

-0.4697

-0.4637

-0.4703

-0.4643

-0.4709

-0.4775

Adj. R2

0.4004

0.2795

0.1586

0.0377

-0.0832

-0.2041

-0.3250

-0.4459

-0.5668

-0.6877

Std.Err.

0.3926

0.2711

0.1496

0.0281

-0.0934

-0.2149

-0.3364

-0.4579

-0.5794

-0.7009

US manufacturers` orders

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.4715

-0.4714

-0.4684

-0.4691

-0.4719

-0.4719

-0.4725

-0.4680

-0.4706

-0.2097

Slope

-0.4725

-0.4775

-0.4744

-0.4730

-0.4710

-0.5039

-0.7258

-0.4748

-0.4724

-0.4734

Adj. R2

0.3441

0.2841

0.2298

0.3412

0.5140

-0.5075

-0.7157

-0.7370

-0.7401

-0.7366

Std.Err.

0.4921

0.2521

0.1613

0.4613

0.2442

-0.5259

-0.7363

-0.8279

-0.7027

-0.7063

US housing starts

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7087

-0.7119

-0.7159

-0.7138

-0.7081

-0.7058

-0.7070

-0.7107

-0.7071

-0.7028

Slope

-0.6947

-0.6906

-0.6884

-0.6959

-0.7086

-0.7034

-0.7031

-0.7081

-0.7032

-0.7103

Adj. R2

-0.4156

-0.4357

-0.4558

-0.4759

-0.4960

-0.8975

-0.9176

-0.9377

-0.9578

-0.9779

Std.Err.

-0.2892

-0.3904

-0.4916

-0.5928

-0.6940

-0.7952

-0.8964

-0.9976

-1.0988

-1.2000

US trade balance

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.7048

-0.7059

-0.7077

-0.7070

-0.7069

-0.7075

-0.7081

-0.7087

-0.7093

-0.7099

Adj. R2

-0.7041

-0.6981

-0.7047

-0.6987

-0.7053

-0.6993

-0.7059

-0.6999

-0.7065

-0.7131

Std.Err.

0.1648

0.0439

-0.0770

-0.1979

-0.3188

-0.4397

-0.5606

-0.6815

-0.8024

-0.9233

US industrial production

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.7071

-0.7070

-0.7040

-0.7047

-0.7075

-0.7075

-0.7081

-0.7036

-0.7062

-0.4453

Adj. R2

-0.7081

-0.7131

-0.7100

-0.7086

-0.7066

-0.7395

-0.9614

-0.7104

-0.7080

-0.7090

Std.Err.

0.1085

0.0485

-0.0058

0.1056

0.2784

-0.7431

-0.9513

-0.9726

-0.9757

-0.9722

GER industrial production

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9443

-0.9475

-0.9515

-0.9494

-0.9437

-0.9414

-0.9426

-0.9463

-0.9427

-0.9384

Adj. R2

-0.9303

-0.9262

-0.9240

-0.9315

-0.9442

-0.9390

-0.9387

-0.9437

-0.9388

-0.9459

Std.Err.

-0.6512

-0.6713

-0.6914

-0.7115

-0.7316

-1.1331

-1.1532

-1.1733

-1.1934

-1.2135

UK industrial production

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-0.9404

-0.9415

-0.9433

-0.9426

-0.9425

-0.9431

-0.9437

-0.9443

-0.9449

-0.9455

Std.Err.

-0.9397

-0.9337

-0.9403

-0.9343

-0.9409

-0.9349

-0.9415

-0.9355

-0.9421

-0.9487

FR industrial production

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-0.9427

-0.9426

-0.9396

-0.9403

-0.9431

-0.9431

-0.9437

-0.9392

-0.9418

-0.6809

Std.Err.

-0.9437

-0.9487

-0.9456

-0.9442

-0.9422

-0.9751

-1.1970

-0.9460

-0.9436

-0.9446

US CPI

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1799

-1.1831

-1.1871

-1.1850

-1.1793

-1.1770

-1.1782

-1.1819

-1.1783

-1.1740

Std.Err.

-1.1659

-1.1618

-1.1596

-1.1671

-1.1798

-1.1746

-1.1743

-1.1793

-1.1744

-1.1815

GER CPI

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.1760

-1.1771

-1.1789

-1.1782

-1.1781

-1.1787

-1.1793

-1.1799

-1.1805

-1.1811

UK CPI

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.1783

-1.1782

-1.1752

-1.1759

-1.1787

-1.1787

-1.1793

-1.1748

-1.1774

-0.9165

FR CPI

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.4155

-1.4187

-1.4227

-1.4206

-1.4149

-1.4126

-1.4138

-1.4175

-1.4139

-1.4096

US PPI

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

US consumer confidence

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

GER business confidence

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

FR business confidence

&nbsp

News

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

-0.2356

Surprise

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

-0.4712

Level

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

-0.7068

Slope

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

-0.9424

Adj. R2

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

-1.1780

Std.Err.

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

-1.4136

The summary of all the statistics variables used in the study ispresented in Table 2.0. Besides, the coefficients for themacroeconomic news response are represented in the form of ‘surprise’and ‘news. The average spread changes or spread yield followingthe standardized of the macroeconomic news and the surprise have alsobeen represented. Table 1.0 indicates there is an impact on theemployment and first activity based macroeconomic announcements (USnonfarm payroll) on the daily yield of the bonds. For example, intable 2.0 the ‘news’ variable value of one leads to a -0.96basis point changes in the Nordic government bond (-0.0096%) and itcauses 0.3 basis point change in the Finnish government bond yieldsand spread. The USA nonfarm payroll announcement with a standardized‘surprises’ of one, led to the 1, 72 basis point changes in theNorway government bond (0.0172%), and 0.36 basis points changes inthe Denmark government bond spread (0.0036%). All the above examplesof USA nonfarm payroll impact on various bonds in Nordic countriesare statistically significant one at least a level of 5%.

The rate of response (‘slope’ and ‘level) of the Germanbenchmark term structure of interest, represent average daily changesin spread and yield (in basis point) following the 3-month GermanBubill change (‘level’) and the spread between the 30-yaetconstant maturity German bond yield as well as the 3-month Bubillyield. The regression of the coefficients is carried out with themacroeconomic announcements during the dates of announcements. Forinstance in Table 1.0 above, during the announcement on a claimconcerning US Jobless, the corporate bond index increased by 6, 77(basis points (0.0677%) while the spread of the same index decreasesby -0.0773%. The two coefficients have 1% statistical level ofsignificance. The table also indicates that the US Joblessannouncement days registered a ten basis point increase in the‘slope’ causing 6, 86 basis points increase in ‘Corp Yield’.It also caused a 2, 55 basis point decrease in the spread. The twocoefficients are also 1% statistically significant.

Findings of table 2.0 show that the largest and most constantvariation of R2 values between various regressions are those thathave changes in the Norwegian government bond yield as a dependentvariable. The results indicate that in this regressions the valuesfor the R2 are lowest when compared to other regressions of yieldchanges. This implies that there is a low explanatory power of theregression when looking at the changes caused by the macroeconomicnews to the Norwegian government bond. This could be due to a weakerrelationship between the Norwegian government bond yields and theGerman term structure of interest compared to other yields, whichalso points out to a weaker relationship between the two countries.

5.3. Impact of MacroeconomicNews Releases on Bond Yields

The results of the data in Appendix 1.0, confirms that some of theforeign macroeconomic news releases have a statistically significantimpact on the Nordic government bond as well as the EuropeanCorporate bond index yield. The finding shows that out of all thenews (23 different types of news) 21 have a statistically significanteffect on at least 10% level of the yield and spread changes of thevarious bonds evaluated. The result also indicates that most of themacroeconomic news release are statistically significant on some ofthe bond yields only and the changes in spread used in this research.

The findings in table 2.0 shows that the coefficients of newsresponse have a statistically significant effect on some bond’syield and spread changes, with the level of significance varyingbetween different corporate bond indices and government bonds. Thefindings also show that 7 out of all the news covered (23, includingboth news and surprises) have no statistically significant impact onthe on any of the corporate index or government bond daily returnschanges. 5 out of the 23 announcements registered no significantstatistically effect on any of the government and corporate bondindex yield changes. However, the findings also imply that in case ofthe corporate bond index or government bond then there are some ofthe macroeconomic announcements that do not have statisticallysignificant impact on either spread or yield changes. Our findingscommensurate with previous findings of the studies such as a studycarried out by Andersson et al. (2009) to examining the impact ofmacroeconomic news surprises on the returns of the bond.

Findings in appendix 1.0 indicate that UK industrial production andFR unemployment types of macroeconomic news do not have statisticallysignificant impact on any spread or yield changes. Deviation in thesignificance of impacts of the macroeconomic announcements on variousbond yields in the regression results is in line with the findings inthe past studies of Faust et al. (2007) and Andersen et al. (2007)that uses data from the intra-day interest rate. But in these paststudies, use of intra-day interest rates leads to an increment insignificance levels of the news coefficients and the regressionexplanatory power is higher. Some of the past studies indicate thatmost market reactions of the volatility and return to the release ofnew information were completed at the time of announcement and lessreaction thereafter. The findings suggest that some part of themacroeconomic news release effect on the bond yields is only confinedto high-frequency adjustments of intra-day data that cannot beuncovered in the daily frequency used in this study.

In my study, daily yield data is used as opposed to intra-day data.This is due to unavailability of intra-day publicly available datafor the Nordic government bond. This information is available to inthe developed countries like Germany and USA. The macroeconomic news‘surprise’ is supposed to have a positive sign for the changes inyield when there are higher news announcements than expected. Thisrelation is expected to be negative for the USA unemployment andjobless claims news, where a relatively higher than expected numbershows that more than anticipated people are unemployed. Analysis ofthe appendix 1 findings from the viewpoint of various governmentbonds and the corporate bond index indicates that Norway, Finland,Denmark, Sweden and corporate bond index have 11, 19, 16, 17, and 16statistically significant news and surprises respectively on thedaily yield and spread changes.

5.4. Impact of the BenchmarkTerm Structure on Bond Yields

The results illustrated in table 2.0 for the ‘slope’, and ‘level’indicates that there is a negative or motive relationship betweenchanges in the slope and level of the German benchmark governmentterm structure and the changes in the bond yields. Theserelationships are statistically significant as indicated in table 2.0results, with an exemption of few relationships. As per the resultsindicated in table 2.0, there is a significant positive change in thecorporate bond index and government bond yield during themacroeconomic announcement days. On the contrary, significantcoefficients on 3-month German Bubill yield are negative for thechanges in the bond spread. The findings show when the 3-month Bubillyield increases, it corresponds with either the decline or increasein the bond yields.

The coefficients values of ‘slope’ are close to ‘level’coefficient values which are consistent with all the regressionfindings. This suggests that the long end of interest rate curve ofGermany government drives yield and spread changes on the short endof the curve. It is observable in table 2.0 that ‘slope’ and‘level’ for Sweden and Finland spread changes have a statisticalsignificance level of between 5 and 10. This is a low level ofstatistical significance compared to that of other countries such asGermany. The findings suggest that the term structure if the interestof the government has a low impact on the spread changes of Swedenand Finland over the yield of the –year Germany government bond.

5.5. Comparison betweenforeign (U.S.A.) Macroeconomic News and European Countries’ News

The macroeconomic announcement between the United States ofAmerica and European Nations tend to vary in various ways. Forexample, the US macroeconomic announcements are announced beforethose of the European countries. The prior macroeconomic announcementin the US influences the performance of other world economies andconsequently impacts the kind of decision investors, and governmentsshould put in place. Besides, prior macroeconomic announcementsinfluence the succeeding macroeconomic announcements in the Europeanscountries in the senses that they help the European bond market toadjust. It also helps the European countries to make propermacroeconomic decisions that will boost their economy andconsequently improve their bond yields.

Empirical research studies show that the U.S macroeconomic newsannouncements have a significant influence on the European bondmarket than any other countries across the globe. The priormacroeconomic announcements influence participants in the Europeanbond market to amend their decisions. It can also help them topredict the performance of their bond by refereeing to the U.Smacroeconomic announcements. The research was conducted by comparingcoefficient of significance between the Scandinavian countriesmacroeconomic spill over, and the U. S. It was found that there was astrong positive correlation between the European and the U.Smacroeconomic news.

Research shows that the reason why the U.S Macroeconomic newsreleases have a significant influence on the European countries isbecause of globalization. The one has become a global village due toadvancement in technology and growth of industrialization. It impliesthat the impact of macroeconomic news from the United States is felteasily and with ease due to globalization. There are a lot ofinterdependent between the economies in particular between the US andEuropeans economy. Such high level of interdependent makes the U.Smacroeconomic news release to impact the European countriessignificantly. Research further shows that the United States ofAmerica is an Engine for global growth and hence any macroeconomicnews announcements may significantly affect the European bond marketand the rest of the world (Benson, Blach‐Ørsten,Powers, Willig, &amp Zambrano, 2012).

These studies utilize comparable macroeconomic news release for theUnited Kingdom, U.S, France, and Germany. Some of the macroeconomicnews used includes consumer price index, unemployment investors’confidence and the rates of unemployment. However, the macroeconomicnews for the United Kingdom regarding the anticipation consumer datawas not made part of the project due to unavailability fromBloomberg. The mentioned macroeconomic news release was regressed asshown the appendices. From the regression table, it can be observedthat the US macroeconomic news among the comparable variables isstatistical significance with a coefficient of variation of 9 and 10percent. The results agree with the results from other researchfindings such as Goldberg and Leonard, 2003. The studies wereconducted by carrying out the inter-day investigations of themacroeconomic news release.

The prior macroeconomic news release carried out in the previousstudies did not have significant impacts as compared to the currentmacroeconomic news release done in this study. Besides, it can beobserved from Table 1.4 in that the European bond market and theScandinavian bond market had weaker reactions to the macroeconomicnews release, especially on unemployment.

Table 1.4

Besides the unemployment news release from France does not affect thedaily spread changes. The study further shows that the unemploymentnews from Germany and France do not have statistically significantcorrelation with the Germany yields on bond. Besides, themacroeconomic news releases on unemployment between Germany andFrance have statistically weak correlations with the macroeconomicnews from the United Kingdom (Beetsma, Giuliodori, De Jong, &ampWidijanto, 2013).

The industrial production macroeconomic news indicates that theUnited States of America and the United Kingdom news announcementshave statistically strong positive correlation with the yield onbonds. On the other hand, macroeconomic news announcements forGermany and France have no effects on bonds and hence such news havea strong negative correlation with the bond yields. Also, the impactof consumers’ index was also investigated as part of macroeconomicnews announcements. It can be observed that the Consumers Price Indexand bond yields have a statistically significant positivecorrelation. Unlike the European countries, the United StatesTreasury bond market focuses on précised macroeconomic newsannouncements which have less important in forecasting futureeconomic impacts. The results of this study suggested that amacroeconomics announcement between the United Kingdom and the

U.S has high spillovers volatilities. Based on the regression resultsin Table 1.4 in the Appendices it can be observed that the comparablecountries are United State, Germany, and France. The surprise andmacroeconomic announcements have been used to assess their effects onthe bond yields between the European countries and the United States.The first column represents macroeconomic news announcements betweenthe United States and European countries. The countries underinvestigation are the independent variables in this case. On theother hand, the succeeding columns indicate changes in theinter-daily news spreads as well as the Scandinavian countries.Besides, the volatility in the news announcements has been minimizedby utilizing standardize news and surprise announcements. Aregression was carried out between the inter-daily yields andmacroeconomic news announcements. Further estimations were done usingthe least square method to find out the extent of comparison betweenthe United States macroeconomic news announcements and the UnitedStates (Kilian, &amp Hicks, 2013).

5.6. Macro-economicannouncement that affects bonds yields most

There are those macroeconomic news that tend to affect bond yieldmore significantly than others. This part tries to find out themacroeconomic news that has great impact on the corporate bond indexand the Scandinavian government bond yields. Some of thosemacroeconomic news announcements that have a significant impact onbond yield have been presented into several rankings. The firstranking of the macroeconomic news can be observed in Table 1.5whereby, the first news represents general news on surprisecoefficient. The general news has impacts on bond yield and changesin the spreads. The second category of the macroeconomic newsannouncement with the most significant impact on bond yields involvesstatistically significant news. Such news tends to have numerousstatistically significant effects on the bond yields. The secondranking of news majorly includes news that has significant effects onthe bond yields. More effects on bonds yield by the second rank ofnews were made by taking into consideration the changes in surprisecoefficient and compared them with the previous literature. It wasnoted that one of the most investigated macroeconomic newsannouncements that affect bond yield most is the surprise variable(Caporale, Spagnolo, &amp Spagnolo, 2014).

Based on Table 1.5 below, those macroeconomic news announcementsthat have significant impacts on bond yields have been ranked fromthe top to the bottom.

Table 1.5

The ranking of those macroeconomic variables has been done followingtheir level of significance. Those with the highest level ofsignificance were ranked on the top while those with the lowest levelof significance were ranked at the bottom. Those macroeconomic newsannouncements with the highest level of significance on bond yieldwere listed on top at 10 percent significance. It was found that somemacroeconomic news releases have the same level of significance suchnews were separated by computing their averages. Those with thehighest percentage were ranked on top as shown in Table 1.5 on theappendices. Based on Table 1.5 in the Appendices, it can bescrutinized that the macroeconomic news release that has the greatestimpact on the bond yield are news on nonfarm payrolls, Frenchindustrial production news, and the United States Consumer industrialnews. Other macroeconomic news such as German consumers’ index andbusiness news were also found to have the most impact on the bondyields. The nonfarm payroll news was found to have the mostsignificant impact on bond yield at 10 percent statistical level ofsignificance. The dominant variables in the nonfarm payrollmacroeconomic news include changes on coefficient yields and surprisefactors. The 10 percent statistical level of significance shows thatthe United States nonfarm macroeconomic news is the most significantnews release. The U.S nonfarm macroeconomic news is succeeded byindustrial news on production, a confidence of consumers,unemployment, and financial news attributable to the production(Chee, &amp Fah, 2013).

Based on Table 1.5 it can be observed that the Finland governmentyields on the bond are the only bond yield that respondssignificantly to all the macroeconomic news release that have beendiscussed. The studies of that macroeconomic news release that have asignificant impact on bond yields have not been adequately exploredin any other forms of literature as I have done in this case.Therefore, that news with the most impact on the bond yield isderived from surprise and spread changes. The information summarizedin Table 1.5 in the Appendices suggest that both European andScandinavian government bonds tend to react strongly on the UnitedStates macroeconomic news announcements as compared to themacroeconomic announcements emanating from the European nations.

The finding obtained from this study is in line with the previousresearch studies done by another researcher on macroeconomic newseffects on bond yields. For instance, Andersen et al, 2003 found thatnonfarm payroll news has a significant impact on bond yield which issimilar to what has been observed in this study. Table 1.5 showsthat the first column contains independent macroeconomic newsvariables while the succeeding columns show the dependent variableswhich include inter-day yield on bond, Scandinavian countries andchanges in the spreads. Therefore, it can be observed that nonfarmpayroll, unemployment rates, consumers’ confidence are among themost important macroeconomic new that have a significant impact onthe bond yields. The daily bond yields were computed based on the tenyears Germany bond benchmark. Standardizations were also done toprevent excessive volatility and ensure that a fair bond yield valueswere obtained that clearly reflects the actual impact of themacroeconomic news release (Altavilla, Carboni, &amp Motto, 2015).

6.0 CHAPTER SIX CONCLUSION

Macroeconomic news announcements were found to have an impacton the bond yield. The research has investigated the spillover effecton macroeconomic announcements whereby, a case study of the EuropeanCorporate Index and Nordic government bonds market was chosen. Thestudy also carried out the analysis to find out whether macroeconomicnews announcement affects bond returns. Besides, the researchinvestigated out whether such news has an impact on bond yield atwhat level of significance they affect bond yields. The study wasdifferent from other studies in the sense that it took intoconsideration various macroeconomic new release, unlike otherstudies. Besides, it employed extensive data for the purpose ofcoming up with proper analysis and findings. A review of theliterature was done carried out to find out other researchers view onthe topic. Studies show that it is true that macroeconomic newsrelease has a significant impact on the bonds yields. The level ofeffect of macroeconomic news varies depending on the country and thetype of macroeconomic news announcements. Studies have further foundthat macroeconomic news in the United States is announcing priorthose in the European countries.

Such news consequently affects the bond yields not only in theUnited States but also in the European countries. The research hasemployed a large set of data to investigate the impact ofmacroeconomic news announcements on bond yields. The data comprisedof 10 years commencing 1st January 2000 to 2010. The study employed acase study design where quantitative data was collected and analyzed.It was found substantial evidence that indicates that there is apositive correlation between macroeconomic news announcements andbond yields. However, it was found that the level of statisticalsignificance varies between macroeconomic news announcements in theUnited States and European countries.

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