Traders! Read the Second Page of the Statistical Release **Before** You Trade!

Traders! Read the second page of the statistical release before you press the button!

Meredith Beechey (who once made the mistake of writing an equation with a pure rate of time preference in front of George Akerlof--a red flag to a bull) and Jonathan Wright have details:

FRB: FEDS paper 2007-5: "Rounding and the Impact of News: A Simple Test of Market Rationality":

Abstract: Certain prominent scheduled macroeconomic news releases contain a rounded number on the first page of the release that is widely cited by newswires and the press, and a more precise number in the text of the release. The whole release comes out at once. We propose a simple test of whether markets are paying attention to the rounded or unrounded numbers by studying the high-frequency market reaction to such news announcements. In the case of inflation releases, we find evidence that markets systematically ignore some of the information in the unrounded number. This is most pronounced for core CPI, a prominent release for which the rounding in the headline number is large relative to the information content of the release.

Keywords: News Announcements, Rounding, Market Efficiency, Rational Inattention

Comments

[Dave Bacon]

Shouldn't that be Traders ignore the second page? Doesn't this show the markets ignore the lower order bits? Or am I parsing this all backwards?

[Rex]

Are you saying that traders should respond to random noise, and not to meaningful news about the economy?
The economic data are simply not accurate to more than one decimal point. Some of them are not accurate to within 10 percentage points (housing starts, for instance).
The CPI is accurate within 0.6 percentage points. The unemployment rate is accurate within 0.12 percentage points.
Reporting the core CPI as up 0.344% is no more accurate than saying it was up 0.3%. In fact, it is less accurate, because it implies a false precision that could mislead users of the data.
This paper is so dumb, I suspect it was written by a trader!