We present a theoretical model to explain how financial traders incorporate public and private information into security prices. We explain that the model enables us to simultaneously identify when public information caused surprises and how large an impact it had on the market. By applying the model to the tick-by-tick data on Japanese government bond futures prices, we show that the Bank of Japan's introduction of quantitative and qualitative monetary easing was one of the most surprising episodes during the period from 2005 to 2016. We also show that the sensitivity to the Bank's announcements has strengthened since the introduction of the negative interest rate policy, whereas the sensitivity to economic indicators and surveys has weakened substantially.
Keywords: Central bank announcements; Government bond futures; Herding behavior; Information efficiency; Market microstructure
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.