not distinguish between news announcement and surprise component and they do not find evidence in
support of an immediate exchange rate response to monetary policy changes.
Adding to the debate on how quickly exchange rates respond to news, we find an absence of
delayed effects which strongly suggests that the exchange rates under study absorb monetary policy
surprises quickly and within the same day as the news are announced. Although our study employs
separate measures of the surprise, the expected component, and the news announcement itself and,
furthermore, we use a market based measure of expectations and thus avoid relying on survey data, our
findings in regards to the speed of the absorption of news are, nevertheless, consistent with the findings
presented in Andersen, Bollerslev, Diebold and Vega (2003) and Simpson, Ramchander and Chaudry
(2005). However, our evidence in favor of a quick absorption process is at odds with the findings of
Evans and Lyons (2005).
The rest of the paper is organized as follows. Section 2 briefly discusses the data and the Fed
funds futures market. Section 3 presents the empirical analysis and results as well as several robustness
checks. Section 4 further discusses our results in light of other contributions and concludes.
2. Data
We focus our analysis on the 42 US monetary policy changes that occurred during the 1989 to 2000 time-
period and use Kuttner’s decomposition (Kuttner 2001) to isolate the surprise component of each of these
actual policy changes. Kuttner (2001) measures surprises associated with an actual monetary policy (i.e.
Fed funds target rate) change as the difference between the actual announcement and expectations, the
latter extracted from Fed funds futures data. Specifically, he uses daily spot-month Fed funds futures
market data for disentangling expected from unexpected changes. He argues that his method for
extracting the unexpected element of a target rate change generally “delivers a nearly pure measure of the
one-day surprise target change” (Kuttner, 2001, p. 529).
Fed funds futures have been trading at the Chicago Board of Trade (CBOT) since October 1988.
Futures contracts with maturities of one through 24 months are listed, along with a current-month (spot-