1. Discussion of the paper: “ Macroeconomic Announcements, Price Discovery, and Order Flow Effects in the Stock Market: Evidence from Incomplete Data and Multiple Financial Markets” by Jose Gonzalo Rangel Thomas Werner Capital Markets and Financial Structure Division European Central Bank 25.05.2006

2. Outline Summary of the paper A few remarks Suggestion for future work

3. Summary of the paper Main focus of the paper: Disentangle US stock price (S&P 500) reaction to macroeconomic news into fundamental price impact and microstructure effects due to heterogeneous information (processing) Main result: Microstructure effect are present for employment announcements

4. Summary of the paper The underlying microstructure model is based on Roll (1984) and Hasbrouck (2004, 2005) Novel element: The effect of news

5. Summary of the paper How to estimate the model without knowing the trade directions q t (buyer versus seller initiated trade) ? Solution: Treat q t as latent variables an use MCMC methods for sampling as proposed by Hasbrouck (2004)

6. Summary of the paper Main result in more detail: Order flow effects are relevant for employment announcements This results is confirmed using S&P 500 futures contracts Order flow effects of employment announcements are also found for 5-year and 10-year US Treasury Note contracts

7. Summary of the paper Interpretation of the results: Order flow effects of employment announcements in the S&P 500 market are driven by the interest rate component The findings of sensitivity of long term interest rates to macro announcements are in line with Gürkaynak, Sack, and Swanson (2005), Important: the paper by Jose shows that heterogeneity is important in understanding private agents revisions of expectations about future Fed action,

8. Remarks and questions Are the order flow effects necessarily driven by asymmetric (heterogeneous) information ? What if employment news effect agents heterogeneously and cause portfolio rebalances ? In this case, order flow effects are than not necessarily related to asymmetric information Is possible to identify both aspects?

9. Remarks and questions How plausible is it that information asymmetries or heterogeneous information processing of news lasts for more than a day? For example, on CNN you can watch online analyses of news effects during the whole day. Investigating intra day data might be more sensible for identification of microstructure effects. Why you don’t use S&P 500 futures contracts? Hasbrouck (2005) uses daily data but focuses on transaction cost effects which might last much longer compared to asymmetric information effects

10. Suggestion for future work Relate your work to Beechey (2006): “A Closer Look at the Sensitivity Puzzle: The Sensitivity of Expected Future Short Rates and the Term Premia to Macroeconomic News” Beechey replicated the Gürkaynak, Sack, and Swanson (2005) analysis separately for the expectation component and the term premia component in long-term interest rates The decomposition is based on an affine term structure model by Kim and Wright (2005)

11. Suggestion for future work Beechey founds that up to 80 percent of the responses of long-term forward rates to macro- economic surprises are due to changes in term premia (and not due to changes in expectations) News about higher unemployment cause a decline in interest rate expectations but an increase in term premia Changes in term premia are probably related to your order flow effects It could be very interesting investigating this relationship