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WORKING PAPER

Public Information and Fixed Income Volatility

Campbell R. Harvey

Fuqua School of Business

Duke University

Roger D. Huang

Owen Graduate School of Management

Vanderbilt University

Abstract

This paper explores the link between both public and private information and volatility in the short-term fixed income market. We argue that high volatility at the opening is due U.S. macroeconomic announcements rather than opening procedures. Indeed, our analysis of the Eurodollar contract traded in the U.K. confirms that volatility increases when U.S. economic news is released. Using the specific releases, volatility is positively correlated with the size of surprise. We also offer some evidence that bad news has a different impact on volatility than good news. The impact of private information trading is measured by examining the actions of the Federal Reserve Bank. Volatility more than doubles when the Fed enters the market around 10:30 CT. With previously unreleased data on open market operations, we find that these operations have a significant impact on both the level and volatility of rates. Finally, we provide a detailed examination of the specific Fed actions and their effect on both rates and volatility during the crash of October 1987.