Examining the effect of RBA target rate news on the interest rate futures market

Abstract

This paper examines the interest rate futures market reaction to the release of RBA target rate news using daily data within an EGARCH framework. The study finds evidence that interest rate futures react to the news component of target rate announcements across the maturity spectrum, with a stronger reaction evident in short maturity futures. There is evidence of an asymmetric news effect whereby interest rate futures have a stronger reaction to unexpected rate rises, than to unexpected rate cuts. The study finds that the RBA target rate announcements resolve uncertainty in interest rate futures, and this effect has intensified following the December 2007 change in RBA communication policy. © Euro Journals Publishing, Inc. 2011.