UC San Diego

This dissertation consists of three essays on monetary policy and asset prices.

The first chapter proposes a novel methodology to disentangle in real-time the signaling effect of a Fed announcement from exogenous monetary shocks. The method relies on the different ways monetary news and non-monetary news change the short end of the yield curve at high frequency, with the latter informed by market responses to macroeconomic data releases. The estimated revelation of Fed information is strongly correlated with the difference between market forecasts and the Fed’s own forecasts. The policy shock is found to have a bigger effect on the economy than suggested using an instrument without adjustment for the signaling effect.

The second chapter studies the structural forces driving the financial market responses to data releases and Fed announcements. I estimate a coherent, realistic framework that prices Treasury bonds based on macroeconomic fundamentals. The framework explicitly recognizes agents' information frictions in regard to contemporaneous aggregate outcomes, successfully matches the market responses to macroeconomic events and sheds light on the nature of news learned by investors at various events.

The third chapter proposes a state-space approach to decomposing a stock's idiosyncratic volatility into a common component and an idiosyncratic one. The measure of the common idiosyncratic volatility is persistent at the daily frequency. It accounts for idiosyncratic volatilities in sample better than GARCH(1,1) and a principal component approach. It also forecasts the future levels of idiosyncratic volatilities better than GARCH(1,1) in the medium- to long-run. I assess its pricing implication in the cross section of stock returns.