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Keywords:Information theory 

Report
The price is right: updating of inflation expectations in a randomized price information experiment

Understanding the formation of consumer inflation expectations is considered crucial for managing monetary policy. This paper investigates how consumers form and update their inflation expectations using a unique ?information? experiment embedded in a survey. We first elicit respondents? expectations for future inflation either in their own consumption basket or for the economy overall. We then randomly provide a subset of respondents with inflation-relevant information: either past-year food price inflation, or a median professional forecast of next-year overall inflation. Finally, inflation ...
Staff Reports , Paper 543

Report
State-dependent pricing under infrequent information: a unified framework

We characterize optimal state-dependent pricing rules under various forms of infrequent information. In all models, infrequent price changes arise from the existence of a lump-sum "menu cost." We entertain various alternatives for the source and nature of infrequent information. In two benchmark cases with continuously available information, optimal pricing rules are purely state-dependent. In contrast, in all environments with infrequent information, optimal pricing rules are both time- and state-dependent, characterized by "trigger strategies" that depend on the time elapsed since ...
Staff Reports , Paper 455

Report
What moves the bond market?

We take a close look at a year in the U.S. Treasury market and try to explain the sharpest price changes and most active trading episodes. The virtue of our analysis lies in its use of high-frequency data on market movements and accurate release times for a comprehensive set of economic announcements. For the period August 1993 to August 1994, we attribute the 25 largest price moves and 25 greatest trading surges to just-released announcements. The bond market's response to announcements in general is consistent with the way we would expect it to react to new information.
Research Paper , Paper 9706

Report
Estimating a structural model of herd behavior in financial markets

We develop a new methodology for estimating the importance of herd behavior in financial markets. Specifically, we build a structural model of informational herding that can be estimated with financial transaction data. In the model, rational herding arises because of information-event uncertainty. We estimate the model using 1995 stock market data for Ashland Inc., a company listed on the New York Stock Exchange. Herding occurs often and is particularly pervasive on certain days. In an information-event day, on average, 2 percent (4 percent) of informed traders herd-buy (sell). In 7 percent ...
Staff Reports , Paper 561

Report
The persistent effects of a false news shock

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the parent company's stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the "news" had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. We use this natural experiment and a simple asset-pricing model to study the aftermath of this false news ...
Staff Reports , Paper 374

Discussion Paper
Dynamic optimal taxation with private information

We study dynamic optimal taxation in a class of economies with private information. Constrained optimal allocations in these environments are complicated and history-dependent. Yet, we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems. The market structure in these economies is similar to that in Bewley (1986): agents supply labor and trade risk-free claims to future consumption, subject to a budget constraint and a debt limit. Optimal taxes are conditioned only on two observable characteristicsan agents accumulated stock of ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 140

Working Paper
Information acquisition in financial markets: a correction

This note provides a proper example for the mechanism of strategic complementarities proposed in our paper. ; Original paper in Review of Economic Studies, January 2000, v. 67, no.1, p. 79?90.
Working Paper Series , Paper WP-07-06

Working Paper
Rational bubbles under diverse information

This paper uses a set of post-extraction information trees to generally model diverse information and agent specific state price processes to define present and fundamental values. It shows that there can be no negative or finite bubbles and that, if agents are impatient and the aggregate endowment has a finite present value under some state price process of some agent, then there can be no bubble under this state price process for any asset with positive supply.
International Finance Discussion Papers , Paper 621

Working Paper
Information systems for risk management

Risk management information systems are designed to overcome the problem of aggregating data across diverse trading units. The design of an information system depends on the risk measurement methodology that a firm chooses. Inherent in the design of both a risk management information system and a risk measurement methodology is a tradeoff between the accuracy of the resulting measures of risk and the burden of computing them. Technical progress will make this tradeoff more favorable over time, leading firms to implement more accurate methodologies, such as full revaluation of nonlinear ...
International Finance Discussion Papers , Paper 585

Working Paper
Extracting information from trading volume

This paper shows how to infer information about any random variable from trading volume, assuming that the random variable and the traders' demands are symmetrically (and then normally) distributed around zero. The volume-based conditional expectation of such a random variable is zero, while the covariance between its absolute value and volume is positive if the variable is jointly normally distributed with the traders' demands. In that case, numerical examples indicate that the volume-based conditional probability of extreme asset value realizations (positive or negative) increases with ...
Finance and Economics Discussion Series , Paper 1997-20

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