03
From expected actions to global repricing.
Worcester College
Monetary Policy Surprises.
Expected actions, target news, path news, global spillovers, and synchronized impact prices.
The Lecture Moves from Actions to News
Identification begins by replacing the observed action with the expectation revision
01
Define the surprise
Policy news is the revision between what markets expected before an announcement and what they price after it.
After expectation − before expectation
02
Isolate current-target news
Kuttner uses federal funds futures to separate anticipated target actions from unexpected actions.
Current-target surprise
03
Recover future-path news
Gürkaynak, Sack, and Swanson show that one factor is not enough: statements also reshape expected future rates.
Target + path factors
Then Take the Surprise Across Borders
The object becomes richer, but it remains policy news
04
Measure global spillovers
Hausman and Wongswan trace U.S. target and path news into foreign equities, currencies, and interest rates.
Foreign-asset response
05
Align the traded asset and window
Kansoy uses U.S.-listed country ETFs to observe impact repricing while foreign cash markets are closed.
Same-window impact
06
Compare the estimands
Each paper answers a richer measurement question without abandoning the surprise principle.
Identification ladder
I
Why surprises, not changes?
Introduction
Policy News Revises Expectations.
The action matters only relative to what the market had already priced.
Information sets before and after
Target versus path news
High-frequency identification
The Policy Object Can Be a Target or a Path
Markets price an entire expected policy sequence—not only today’s rate
\[
g_t \equiv g\!\left(r_t^{*},r_{t+1}^{*},\ldots,r_{t+H}^{*}\right)
\]
Policy state
\(r_{t+h}^{*}\)
The central-bank target at date \(t+h\).
Horizon
\(H\)
How far ahead expected policy matters for the asset payoff.
Chosen object
\(g_t\)
Current target, future path, or an average expected policy rate.
Policy News Is a Filtration Revision
Compare the conditional expectation immediately after the announcement with the one immediately before
\[
S_t(g)\equiv
\mathbb E[g_t\mid\mathcal F_{t^+}]
-
\mathbb E[g_t\mid\mathcal F_{t^-}]
\]
Before
priced expectation
\(\mathcal F_{t^-}\)
\(\mathcal F_{t^-}\)
Announcement
new information arrives
After
revised expectation
\(\mathcal F_{t^+}\)
\(\mathcal F_{t^+}\)
Policy News Reorders Expectations
The new information changes the ordering of expected policy states and reshapes the path
State revision
The market already held a distribution
The announcement does not create expectations from nothing. It changes the probabilities and ordering of states that were already priced.
Event-study object
After minus before
Measure the same asset and the same policy object on both sides of the information arrival.
Interpretation: policy news is the revision, not the level of the post-announcement path.
The Surprise Is Unpredictable Before the Event
Unpredictable does not mean economically small—it means orthogonal to pre-announcement information
\[
\mathbb E\!\left[S_t(g)\mid\mathcal F_{t^-}\right]=0
\]
Definition
If the market could predict the revision using \(\mathcal F_{t^-}\), that predictable component should already be in the pre-announcement price.
Positive surprise
More hawkish than priced
For the chosen object \(g_t\), the post-announcement conditional expectation is higher.
Zero surprise
Confirmation
The announcement delivers the expectation already embedded in the price.
Only Surprises Move Impact Prices
Anticipated policy is already absorbed; the surprise branch creates a price revision
Anticipated branch
Action without news
When the decision equals the market’s conditional expectation, the announcement confirms the price already in place.
Unexpected branch
News without a predetermined sign
The revision can move the yield curve in either direction. Identification isolates the branch; the data determine the response.
Target and Path News Differ
A meeting can contain almost no target news and still deliver large path news
Current-target news
\[
S_t^{\mathrm{target}}
=
r_t^{*}
-
\mathbb E[r_t^{*}\mid\mathcal F_{t^-}]
\]
The unexpected part of today’s target decision.
Future-path news
\[
S_{t,h}^{\mathrm{path}}
=
\mathbb E[r_{t+h}^{*}\mid\mathcal F_{t^+}]
-
\mathbb E[r_{t+h}^{*}\mid\mathcal F_{t^-}],
\quad h>0
\]
The revision to a future policy rate.
One Announcement, Two Dimensions
The short lever moves the current target; the long lever reshapes the future path
Target factor
Current decision
Loads directly on the current-month policy-rate surprise.
Path factor
Expected future stance
Moves the expected rate path while remaining orthogonal to the current-target loading.
Why one factor fails: the announcement can move either lever without moving the other.
Policy-Path Lab: Which Horizon Moves?
Switch between current-target news, future-path news, and a combined announcement
Before
After
Announcement dimension
Current-target news shifts the near point and fades along the horizon.
Reading rule
Ask which horizon moved
A current-target surprise and a forward-guidance revision can occur together, separately, or with opposite signs.
Measure the Intrawindow Change
Measure the price immediately before and after the announcement
\[
\Delta_w x_t \equiv x_{t^+}-x_{t^-},
\qquad w=[t^-,t^+]
\]
Old expectation in price
t− · before
t+ · after
New expectation in price
Long Yields Price a Path Plus a Term Premium
A long yield can move even when the current target does not
\[
i_t^{(n)}
\approx
\frac{1}{n}\sum_{j=0}^{n-1}
\mathbb E[i_{t+j}^{(1)}\mid\mathcal F_t]
+
\operatorname{TP}_t^{(n)}
\]
Expected short-rate path
Average expected stance
Current and expected future one-period rates over the maturity.
Term premium
Compensation for risk
Duration, inflation, liquidity, and other risks embedded in the long bond.
A Yield Surprise Has Three Additive Pieces
The accounting identity is clear; identification requires policy-news measures
\[
\Delta_w i_t^{(n)}
\approx
\underbrace{\frac{1}{n}\Delta_w i_t^{(1)}}_{\text{current short rate}}
+
\underbrace{\frac{1}{n}\sum_{j=1}^{n-1}\Delta_w\mathbb E[i_{t+j}^{(1)}\mid\mathcal F_t]}_{\text{expected future path}}
+
\underbrace{\Delta_w\operatorname{TP}_t^{(n)}}_{\text{term premium}}
\]
Current rate
near-point revision
Future path
expected-rate revision
Term premium
risk compensation
Long yield
\(\Delta_w i_t^{(n)}\)
Path News Revises Expectations
Forward guidance changes conditional expectations of future short rates
\[
\Delta_w\mathbb E[i_{t+j}^{(1)}\mid\mathcal F_t]
=
\mathbb E[i_{t+j}^{(1)}\mid\mathcal F_{t^+}]
-
\mathbb E[i_{t+j}^{(1)}\mid\mathcal F_{t^-}]
\]
Predictable action
No revision
If already priced, the action creates no path news.
Statement language
Path revision
Guidance can move distant expected short rates immediately.
Risk channel
Premium revision
A term-premium change can move the same long yield.
Monthly Data Mix Policy and Macro News
The solution is a different regressor—not merely a different estimator
\[
\Delta y_t=\alpha+\beta\Delta r_t+\varepsilon_t
\]
| Failure | Why it enters | Consequence |
|---|---|---|
| Reverse causality | The bank reacts to financial conditions while markets react to the bank. | \(\operatorname{Cov}(\Delta r_t,\varepsilon_t)\neq0\) |
| Omitted macro news | Inflation, employment, output, and risk news move both the rate and the asset. | \(\beta\) absorbs non-policy information. |
| Anticipation | Expected policy is priced before the meeting. | The observed action is not the news. |
High Frequency Changes the Regressor
Use a policy-news vector extracted from futures prices inside a narrow event window
\[
\Delta_w y_t
=
\alpha+\theta^\prime S_t+\varepsilon_{t,w}
\]
\[
\mathbb E[\varepsilon_{t,w}\mid S_t]=0
\]
Window
Short enough to exclude unrelated news; long enough for markets to price the announcement.
Shock
\(S_t\) is an expectation revision, not a raw policy action.
Caution: a market surprise can still combine target news, path news, and central-bank information about the economy.
II
The target surprise from federal funds futures.
Kuttner (2001)
Separate Actions from News.
The expected component attenuates raw-action regressions; futures recover the unexpected current-target change.
Action = expected + surprise
Calendar-weighted futures
Yield responses reappear
Raw Target Changes Make Policy Look Weak
The puzzle is the regressor—not the disappearance of monetary-policy transmission
\[
\Delta R_{j,t}=\alpha_j+\beta_j\Delta r_t^{*}+\varepsilon_{j,t}
\]
Measurement problem
Raw changes mix old and new information
The post-1989 coefficient is weaker because target changes became more predictable, not because yields stopped responding to news.
| 100 bp action | 3m | 2y | 10y |
|---|---|---|---|
| Cook–Hahn, 1974–79 | 55 | — | ≈10 |
| Kuttner, 1989–2000 | 26.8 | 18.2 | 4.3 |
Cook and Hahn (1989); Kuttner (2001), Table 1.
Actions Split into Expected and Surprise
Only the unexpected component is new policy information at the announcement
\[
\Delta r_t^{*}
=
\underbrace{\Delta r_t^{e}}_{\text{anticipated}}
+
\underbrace{\Delta r_t^{u}}_{\text{surprise}}
\]
Observed action
\(\Delta r_t^*\)
Expected part
already priced
Surprise part
new information
Asset response
\(\Delta R_t=\beta\Delta r_t^u+\varepsilon_t\)
Expected Actions Attenuate the Estimate
Explore how the surprise share maps a true response into the raw-action estimate
\[
\operatorname*{plim}\widehat\beta_{\mathrm{raw}}
=
\beta
\frac{\operatorname{Var}(\Delta r_t^u)}
{\operatorname{Var}(\Delta r_t^u)+\operatorname{Var}(\Delta r_t^e)}
\]
80
True \(\beta\)
40
Raw estimate
50%
Attenuation
Numerator
True policy surprises
The variation that can create an announcement response.
Denominator
All target changes
Surprise variation plus predictable variation.
Predictability is good communication but bad measurement when expected actions are treated as shocks.
The Variance Ratio Is the Surprise Share
Actual policy can vary substantially while announcement surprises remain small
\[
\frac{\operatorname{Var}(\Delta r_t^u)}
{\operatorname{Var}(\Delta r_t^u)+\operatorname{Var}(\Delta r_t^e)}
=
\frac{\text{variation in surprises}}{\text{variation in actual target changes}}
\]
| Meeting | Actual \(\Delta r_t^*\) | Expected \(\Delta r_t^e\) | Surprise \(\Delta r_t^u\) |
|---|---|---|---|
| 1 | +25 | +25 | 0 |
| 2 | +25 | +20 | +5 |
| 3 | 0 | 0 | 0 |
| 4 | −50 | −45 | −5 |
Monthly Futures Price an Average
The target surprise affects only the remaining \(D-d\) calendar days
Contract object
Average effective federal funds rate
Let \(D\) be days in the month and \(d\) the days already fixed when the announcement arrives.
\[
\omega_{\mathrm{repriced}}=\frac{D-d}{D}
\]
Calendar exposure
The announcement changes the expected rate only for the red portion of the settlement month.
Before and After Share the Same Fixed Days
The historical part and the old target are common to both contract prices
\[
\begin{aligned}
f^0_{s,t^-}
&= \frac{d}{D}\bar r_{\le d}
+ \frac{D-d}{D}
\left(r^{old}+\mathbb E[\Delta r_t^*\mid\mathcal F_{t^-}]\right)
+\mu^0_{s,t^-},\\[0.45em]
f^0_{s,t^+}
&= \frac{d}{D}\bar r_{\le d}
+ \frac{D-d}{D}
\left(r^{old}+\Delta r_t^*\right)
+\mu^0_{s,t^+}.
\end{aligned}
\]
Before: expected action
The remaining-month block contains the action priced before the announcement.
After: realised action
The fixed days and old target are unchanged; the action is now known.
Differencing Removes Fixed Days
The old target and historical average cancel
\[
\Delta_w f^0_{s,t}
=
\frac{D-d}{D}
\left(
\Delta r_t^*
-
\mathbb E[\Delta r_t^*\mid\mathcal F_{t^-}]
\right)
+
\Delta_w\mu^0_{s,t}
\]
Cancels
Historical average
The \(d\) already-realised days are identical before and after.
Cancels
Old target
The pre-event rate is common to both contract valuations.
Remains
Diluted surprise
Plus any intrawindow futures-premium change.
Kuttner Rescales the Futures Movement
Undo the monthly-average attenuation to recover the unexpected current-target change
\[
\Delta_w\mu^0_{s,t}\approx0,
\qquad
\Delta r_t^u
\equiv
\Delta r_t^*-\mathbb E[\Delta r_t^*\mid\mathcal F_{t^-}]
\]
\[
\boxed{
\mathrm{mp1}_t
\equiv
\Delta r_t^u
=
\frac{D}{D-d}
\left(f^0_{s,t^+}-f^0_{s,t^-}\right)
}
\]
The Scale Factor Reverses Monthly Averaging
Move the announcement through a 30-day month and observe the gross-up
15
Repriced days
2.00
Scale \(D/(D-d)\)
10.0
mp1 from a 5 bp move
\[
\mathrm{mp1}
=
\frac{30}{30-d}\times 5\text{ bp}
\]
Original Kuttner window
Close to close
Previous-day futures close to announcement-day futures close.
Later implementations
Narrow intraday window
The economic object is unchanged; better data make the information window more local.
Near month-end, the same gross-up that recovers the signal also amplifies quote and premium noise.
Read the Implied Rate, Not the Futures Price
Reversing the price/rate sign reverses the economic interpretation
\[
f=100-\text{futures price}
\]
Futures price falls
\(\Delta F<0\)
Implied rate rises
\(\Delta f>0\)
mp1 > 0
hawkish surprise
Implementation check: perform all surprise algebra in implied-rate units, then translate back to the quoted futures price if needed.
Month-End Scaling Amplifies Noise
When \(D-d\) is small, the gross-up becomes fragile
Mechanical issue
\(\frac{D}{D-d}\)
Explodes as the remaining-day count approaches zero.
Noise channel
Bid–ask and premium moves
The same factor multiplies quote error and intrawindow futures-premium changes.
Operational response
Switch contracts
Use the next-month contract when too few current-month days remain exposed.
\[
\Delta r_t^e=\Delta r_t^*-\Delta r_t^u
\]
Estimate Expected and Surprise Effects
The regression asks whether yields respond to the action or to the news inside it
\[
\Delta R_{j,t}
=
\alpha_j
+
\beta_{e,j}\Delta r_t^e
+
\beta_{u,j}\Delta r_t^u
+
\varepsilon_{j,t}
\]
Expected coefficient
\(\beta_{e,j}\)
Response to a policy action already priced before the meeting.
Surprise coefficient
\(\beta_{u,j}\)
Basis-point yield response to a 100 bp unexpected tightening.
A Rate Cut Can Still Be Hawkish News
Hawkish and dovish describe the action relative to the expected counterfactual
\[
\Delta r_t^u=-25-(-50)=+25\text{ bp}
\]
Observed action
−25 bp
The Federal Reserve eases.
Unexpected component
+25 bp
Policy is 25 bp tighter than the market expected.
The Yield Response Reappears in the Surprise
Native chart: basis-point yield response to a 100 bp target component
Raw action
Surprise component
Two-year example
≈15 bp
A 25 bp surprise tightening implies \(0.25\times61.4\simeq15\) bp.
Result
Large across the curve
Surprise responses are 79.1, 61.4, 48.1, and 31.5 from 3 months to 10 years.
Kuttner (2001), Tables 1 and 3.
Target Surprises, 1990–2004
Target news varies sharply across meetings and is often small even when actions occur
Gürkaynak, Sack, and Swanson (2005); supplied course chart.
Target Surprises, 2005–2025
The modern sample preserves the same target-revision object around each FOMC announcement
Kansoy (2025); supplied course chart.
Target News Moves the Expected Path
A long yield responds when target news changes expected future short rates or the term premium
\[
\Delta_w i_t^{(n)}
\approx
\frac{1}{n}\sum_{h=0}^{n-1}
\Delta_w\mathbb E[i_{t+h}^{(1)}\mid\mathcal F_t]
+
\Delta_w\operatorname{TP}_t^{(n)}
\]
Target surprise
\(\mathrm{mp1}\)
Expected path
future short rates
Long yield
path + premium
Nearby Futures Reveal Timing News
Similar sub-one responses across nearby horizons suggest that target news often shifts timing
\[
\Delta f_{h,t}=a_h+\lambda_h\Delta r_t^u+u_{h,t}
\]
| Horizon | 1m | 2m | 3m | 4m | 5m |
|---|---|---|---|---|---|
| \(\widehat\lambda_h\) | 0.64 | 0.62 | 0.55 | 0.61 | 0.57 |
The legacy prose says “above one-for-one,” but its own \(0.55\)–\(0.64\) table says otherwise. The interpretation follows the numbers.
Kuttner (2001), Table 7.
Limit 1: Target News Is One Dimension
A scalar surprise omits path news that arrives without current-target news
\[
\Delta_w f^0_{s,t}
\Longrightarrow
S_t^{\mathrm{target}}
\]
Kuttner object
Current-target revision
One contract maps into one scalar policy-news measure.
\[
i_t^{(n)}
\approx
\frac1n\sum_{h=0}^{n-1}\mathbb E[i_{t+h}^{(1)}\mid\mathcal F_t]
+\operatorname{TP}_t^{(n)}
\]
Omitted dimension
Future-rate revision
A statement can move \(\mathbb E[i_{t+h}^{(1)}]\) for \(h>0\) while \(S_t^{target}\approx0\).
Limit 2: No Action Can Still Be News
A statement can revise the future stance while the current target is unchanged and fully expected
\[
\Delta r_t^*=0,
\qquad
\Delta r_t^u\approx0
\]
Duration
How long?
The statement can revise how long the current stance will last.
Path
What next?
It can move the expected sequence of future policy rates.
Information
What does the bank know?
It can reveal the central bank’s assessment of the economy.
III
Target and path: two dimensions of policy news.
Gürkaynak, Sack, and Swanson (2005)
Words Move the Policy Path.
Statements can reshape the expected policy path even when the current target delivers no surprise.
Five intraday futures measures
Rank test and two factors
Target/path rotation
January 2004: Path News Without Action
The target stayed at 1%, exactly as expected; the statement changed the expected timing of liftoff
\[
\Delta r_t^*=0,
\qquad
\mathrm{mp1}_t\simeq0
\]
Language revision
“Considerable period” → “patient”
Markets inferred that the first rate hike had moved closer even though the current target did not change.
| 30-minute response | Move |
|---|---|
| 2-year Treasury | +20 bp |
| 5-year Treasury | +25 bp |
| 10-year Treasury | +15 bp |
| S&P 500 | about −1% |
GSS Observe a Five-Variable Intraday Vector
Dimensionality becomes visible when short- and longer-horizon futures do not move together
\[
w=[-10,+20]\text{ minutes}
\]
\[
X_t=
[\mathrm{mp1}_t,\ \mathrm{mp2}_t,\ \Delta\mathrm{ed2}_t,\ \Delta\mathrm{ed3}_t,\ \Delta\mathrm{ed4}_t]
\]
mp1
current target
mp2
next meeting
ed2
≈2 quarters
ed3
≈3 quarters
ed4
≈4 quarters
Instruments Span Target and One-Year News
The cross-horizon covariance pattern determines how many factors are needed
| Component | Instrument | Horizon captured |
|---|---|---|
| \(\mathrm{mp1}_t\) | Current-month fed funds futures | Current target decision |
| \(\mathrm{mp2}_t\) | Second-month fed funds futures | Next FOMC meeting |
| \(\Delta\mathrm{ed2}_t\) | Eurodollar futures | About 2 quarters ahead |
| \(\Delta\mathrm{ed3}_t\) | Eurodollar futures | About 3 quarters ahead |
| \(\Delta\mathrm{ed4}_t\) | Eurodollar futures | About 4 quarters ahead |
Second-Month Futures Mix Two Meetings
Today’s target news affects every day before the next meeting; mp2 is incremental news after it
\[
\Delta_w FF2_t \equiv FF2_t^{after}-FF2_t^{before}
\]
\[
\Delta_w FF2_t
=
\underbrace{\frac{d_2}{D_2}\mathrm{mp1}_t}_{\text{today's target news}}
+
\underbrace{\frac{D_2-d_2}{D_2}\mathrm{mp2}_t}_{\text{rate after next meeting}}
+
\Delta_w\rho_t
\]
First block
Before next meeting
The current-target surprise applies mechanically.
Second block
After next meeting
The incremental next-meeting surprise applies.
Wedge
Premium change
Assumed negligible within the narrow event window.
Strip Out mp1 to Recover Next-Meeting News
Subtract the mechanical current-target effect, then undo averaging over post-meeting days
\[
\boxed{
\mathrm{mp2}_t
=
\left[
\Delta_w FF2_t
-
\frac{d_2}{D_2}\mathrm{mp1}_t
\right]
\frac{D_2}{D_2-d_2}
}
\]
Step 1
Subtract mp1
Remove today’s mechanical target effect.
Step 2
Undo averaging
Gross up the post-next-meeting block.
Step 3
Interpret mp2
A raw next-meeting surprise—an input to, not the output of, the factor model.
Rank Tests Reveal Two News Dimensions
One factor is rejected; two factors are not
\[
X_t=F_t\Lambda+\eta_t,
\qquad
F_t\in\mathbb R^k
\]
Decision
\(k=1\) rejected; \(k=2\) retained
A scalar Kuttner-style target factor cannot summarize the covariance structure.
| \(H_0\): factors | Wald | p-value |
|---|---|---|
| \(k=0\) | 36.61 | 0.00007 |
| \(k=1\) | 17.19 | 0.004 |
| \(k=2\) | 1.06 | 0.304 |
Gürkaynak, Sack, and Swanson (2005), Table 2.
Rotate PCA into Target and Path
Rotation gives economic labels to the empirical directions
\[
F_t=(F_{1,t},F_{2,t}),
\qquad
Z_t=F_tU=(Z_{1,t},Z_{2,t})
\]
Factor \(Z_1\)
Target
Normalize the factor to move \(\mathrm{mp1}\) one-for-one.
Factor \(Z_2\)
Path
Choose a direction with no effect on \(\mathrm{mp1}\).
The Path Direction Is Orthogonal to mp1
The rotation separates current-target loading from the remaining policy-path direction
target direction \(u_T\)
path direction \(u_P\)
\[
\gamma^\prime u_P=0
\]
Restriction
No mp1 loading
If \(\gamma\) is the mp1 loading on the PCA factors, the path vector is chosen perpendicular to it.
Target and path are empirical announcement dimensions; they do not separate every deeper structural shock.
Regress Prices on Target and Path
The coefficients separate the current-target response from the future-path response
\[
\Delta y_t
=
\alpha
+
\beta Z_{1,t}^{\mathrm{target}}
+
\gamma Z_{2,t}^{\mathrm{path}}
+
\varepsilon_t
\]
Target factor
current target
Asset return
announcement window
Path factor
future stance
Path News Moves Medium and Long Yields
Native chart: target and path responses from GSS Table 5
Target
Path
Short end
Target dominates
The target coefficient is 0.48 at two years and 0.13 at ten.
Medium and long end
Path remains strong
Path coefficients are 0.37 at five years and 0.28 at ten.
Gürkaynak, Sack, and Swanson (2005), Table 5.
GSS Path Factor, 1990–2005
Statement language creates substantial path news even when current-target news is small
Gürkaynak, Sack, and Swanson (2005); supplied course chart.
Target and Path Surprises, 2005–2025
The two series remain distinct in the modern sample
Kansoy (2025); supplied course chart.
IV
U.S. policy surprises become global shocks.
Hausman and Wongswan (2011)
Policy News Crosses Borders.
Target and path news transmit through different prices, horizons, and country adjustment margins.
49-country event set
Asset-specific responses
Exchange-rate regimes
Take Kuttner-GSS Global
Do U.S. target and path surprises move foreign assets—and which asset absorbs each dimension?
| Event set | FOMC announcements, February 1994–March 2005 |
|---|---|
| Countries | 49 countries for equities and exchange rates; smaller interest-rate sample |
| Outcomes | Foreign equities, exchange rates, 3-month rates, and 10-year yields |
| Window | Daily local-market window around the FOMC announcement |
Question
Which foreign price moves?
The same U.S. shock can load differently on equity, currency, and bond markets.
Mechanisms
Discount rates, currency, risk appetite
A U.S. surprise becomes global when it changes any of these margins abroad.
Hausman and Wongswan (2011).
Target and Path News Route Differently
The target pulse reaches equities most strongly; the longer path wave reaches currencies and long bonds
Target channel
Foreign equities
Near-term policy news changes discounting and risk appetite, producing the largest equity response.
Path channel
Currencies and long yields
The one-year-ahead revision has the larger loading in exchange rates and longer bonds.
Cross-asset pattern: one U.S. announcement routes through several foreign balance-sheet prices.
Measure Target and One-Year Path News
Orthogonalize the path measure with respect to the current-target surprise
Target surprise
\[TS_t=\text{current-target surprise}\]
Measured from federal funds futures.
Raw path revision
\[PS_t^I=\Delta\text{ one-year-ahead Eurodollar rate}\]
Captures one-year-ahead policy news plus any target-related component.
\[
PS_t^I=\omega_0+\omega_1TS_t+PS_t^{II}
\]
Regression and PCA Measures Agree
Two constructions recover a similar cross-meeting path direction
Regression residual
\(PS^{II}\)
Remove the linear target-surprise component from the one-year-ahead rate revision.
Rotated PCA
GSS path factor
Choose the direction orthogonal to the mp1 loading.
Kansoy (2025); supplied course chart.
Estimate Asset-Specific Foreign Responses
The same U.S. shock is allowed to load differently across asset classes
\[
R^a_{i,t}
=
\alpha^a
+
\beta_T^a TS_t
+
\beta_P^a PS_t
+
\varepsilon^a_{i,t}
\]
Target response
\(\beta_T^a\)
Asset-class response to current-target news.
Path response
\(\beta_P^a\)
Asset-class response to the future-path revision.
Panel
Countries × events
Pools announcement responses across countries.
Target Moves Equities; Path Moves Yields
Read the cross-asset pattern in the units appropriate to each market
| Foreign asset | Target | Path II | Main channel |
|---|---|---|---|
| Equity index | −4.13% | −0.89% | Target |
| Exchange rate | −0.16% | +2.61% | Path |
| 3-month rate | +21 bp | +19 bp | Both |
| 10-year yield | +12 bp | +31 bp | Path |
Equity
Target news produces the largest response.
Currency
Positive coefficient means dollar appreciation.
Long yield
Path news is the dominant policy dimension.
Hausman and Wongswan (2011), Table 3, Path Surprise II.
Read the Cross-Asset Pattern
Target and path factors transmit through different prices and horizons
Target-news route
Target
Equities
Contractionary target news compresses foreign equity valuations most strongly.
Path-news route
Path
FX + long yields
Path news produces the larger currency and long-yield response.
Institutions Shape the Adjustment Margin
The exchange-rate regime helps determine whether the shock is absorbed by currency, rates, or equities
\[
R^a_{i,t}
=
\alpha^a+\beta^aS_t
+\gamma^a(S_t\times X_{i,t-1})
+\varepsilon^a_{i,t}
\]
| Characteristic | Main implication |
|---|---|
| Less flexible exchange rate | Larger equity and interest-rate responses |
| More flexible exchange rate | Larger currency response |
| Higher U.S. equity ownership | Larger foreign-equity response |
| Trade and bank exposure | Additional cross-country variation |
V
Country ETFs, impact repricing, and synchronized outcomes.
Kansoy (2026)
Measure Closed-Market Impact.
A clean surprise needs an outcome observed inside the same clock window.
Timing mismatch
U.S.-listed country ETF
Asset and window alignment
At 14:00 ET, Foreign Cash Markets Close
The same FOMC announcement reaches open U.S. markets now and many foreign cash markets later
Kansoy (2026); supplied course timeline.
Timing Mismatch Clouds the Impact
A clean shock measure still needs an outcome observed inside the same event window
\[
\underbrace{\text{New York FOMC window}}_{\text{shock occurs}}
\neq
\underbrace{\text{local cash-market window}}_{\text{price observed}}
\]
14:00 ET
FOMC news
Many hours
other global news
Next opening
local cash price
A daily local-index return combines U.S. policy news with unrelated information arriving before the market reopens.
ETFs Reprice While Cash Markets Sleep
New York supplies an immediate tradable claim; the local exchange catches up later
Immediate price
Tradable country claim in New York
The ETF continues trading while its underlying foreign cash market is closed.
Timing test
Next local opening
If the ETF discovers country information first, its event-window return should predict the next local opening gap.
Sign-neutral: the illustration shows repricing and catch-up, not a predetermined return direction.
Country ETFs Reveal the Impact Price
The ETF aligns the foreign equity claim with the shock clock
\[
R^{ETF,USD}_{i,\tau}
=
\alpha_i+\beta_iS_\tau+\varepsilon_{i,\tau}
\]
Outcome
\(R^{ETF,USD}_{i,\tau}\)
Immediate dollar return on a tradable claim on country \(i\).
Shock
\(S_\tau\)
High-frequency U.S. monetary-policy surprise.
Impact loading
\(\beta_i\)
Country \(i\)’s response inside the announcement window.
Four Checks Make the ETF an Impact Measure
The question is whether the ETF reveals price discovery—not a shock-correlated wrapper premium
| Check | What should happen |
|---|---|
| Closed-market timing | ETF returns predict the next local opening gap when the local cash market was closed. |
| Open-market placebo | The same prediction is weak when the local market was open. |
| Cross-asset coherence | ADRs, FX, currency futures, and non-U.S. equity futures move consistently. |
| Residual basis | After removing FX, the ETF–futures wedge does not load on the policy shock. |
The Next Opening Tests Timing
Predictive content should appear precisely where asynchronous trading creates it
\[
Gap^{LC}_{i,t+1}
=
\alpha_i
+
\gamma R^{ETF,USD}_{i,\tau}
+
\delta X_\tau^{US}
+
\nu_{i,t+1}
\]
Local market closed
\(\gamma>0\)
The ETF discovers information first; the next opening gap follows it.
Local market open
\(\gamma\simeq0\)
Both prices absorb the news together; the predictive relation should disappear.
Estimate Impact in One Window
Compare local indexes, daily ETFs, and 30-minute ETFs under progressively better alignment
\[
R^{USD}_{i,\tau}
=
\alpha+\beta\,MPS_\tau+\varepsilon_{i,\tau},
\qquad MPS_\tau>0
\]
Daily index
wrong asset clock
Daily ETF
better traded object
30-minute ETF
asset + window aligned
Intraday ETFs Recover the Impact
Native chart: coefficient magnitude rises and explanatory power jumps with better alignment
Absolute \(\widehat\beta\)
\(R^2\) annotation
Daily local index
−0.021
\(R^2=0.010\); 1 SD response −0.13%
Daily country ETF
−0.064
\(R^2=0.038\); 1 SD response −0.38%
30-minute country ETF
−0.076
\(R^2=0.333\); 1 SD response −0.46%
Kansoy (2026); 1 SD monetary surprise = 6.01 bp.
Separate the Asset from the Window
Measurement improves twice: first the asset, then the clock
Daily local index
local cash claim
Daily country ETF
tradable country claim
30-minute ETF
same-window impact
Index → ETF
Change the traded object
Recover much of the coefficient magnitude by observing a tradable country claim in New York.
Daily → 30 minutes
Change the event window
Recover the impact signal and sharply increase explanatory power.
Small Rate Shocks Move Valuations
Translate the aligned impact estimate into an economically legible benchmark
1 SD tightening
6.01 bp
Foreign claim
−0.46%
Non-U.S. equity
about $65tn
Valuation benchmark
$150–300bn
Approximate foreign equity-market value repriced within thirty minutes.
Boundary
Not a welfare estimate
This is not a realized cash-flow loss and not a causal measure of social welfare.
Σ
Actions, news, dimensions, spillovers, synchronized outcomes.
A sequence of estimands
One Identification Ladder.
Each step enriches the policy-news object or better aligns the asset with the shock clock.
Actions → surprises
Surprises → factors
Spillovers → impact
Domestic: Actions to Dimensions
The first step replaces the action; the second enriches the policy-news vector
Kuttner (2001)
Actions or surprises?
Object: futures-implied unexpected current-target change.
Lesson: expected target changes do little on impact.
GSS (2005)
Is one surprise enough?
Object: a futures vector rotated into target and path factors.
Lesson: statements move the expected path.
Observed action
Target surprise
Target + path
Global: Spillovers to Impact
The estimand evolves when the previous outcome no longer shares the shock clock
Hausman–Wongswan (2011)
Do U.S. shocks transmit abroad?
Object: target and orthogonal path surprises in foreign-asset panels.
Lesson: transmission channels differ by asset.
Kansoy (2026)
What if local markets are closed?
Object: intraday U.S.-listed country ETF return.
Lesson: country claims reprice immediately in New York.
Foreign spillover
Tradable country claim
Same-window impact
The Lecture Is One Identification Ladder
Good event studies synchronize the information set, the shock, the asset, and the clock
Policy action
Target surprise
Target + path
Foreign spillovers
Impact price
1
Remove expectation
Subtract what markets priced before the event.
2
Separate horizons
Current target and future path are distinct.
3
Match the asset
Each factor has a natural price and horizon.
4
Align the clock
Observe the outcome inside the shock window.
Each Rung Adds a Richer Estimand
The upward progression represents identification—not market direction
Rungs 1–2
Richer policy news
Move from a scalar current-target surprise to a two-dimensional target/path vector.
Rungs 3–4
Better outcomes
Move from foreign daily spillovers to a tradable country claim observed inside the shock window.
Design principle: every rung changes the estimand or its alignment, never the assumed return sign.
Four Questions Before Any Coefficient
Interpretation begins with the measurement design—not the sign of \(\widehat\beta\)
1 · Expectation
What was expected?
The action itself is not the shock.
2 · Horizon
Which horizon moved?
Current target and future path are distinct.
3 · Asset
Which price absorbs it?
Equities, currencies, and yields load differently.
4 · Clock
Is the outcome synchronized?
Closed markets require a tradable impact proxy.
End · Lecture 3
Monetary Policy Surprises.
Fatih Kansoy
Central Banking · Lecture 3
03/