Let's Get "Real" About Using Economic Data

Abstract

Breeden, Gibbons and Litzenberger (1989), and Lamont (1999), use "economic tracking portfolios" to forecast macroeconomic data. Tracking portfolios are constructed to reflect market expectations and reveal the impact of news. However, these papers, as well as many related studies which examine the market impact of macroeconomic news, use "currently available" macroeconomic data. The combination of various different "vintages" of economic data has several important and undesirable consequences, particularly when the timing of information and its impact on financial markets is the focus of investigation. We therefore use a real-time macroeconomic data set to accurately mimic the accumulation of macroeconomic information in real time. We attempt to shed new light on the methodology used to construct tracking portfolios, as well as on the impact of macroeconomic news on financial markets. In addition, we address a number of related questions, including: Does the data revision process itself have an impact on financial markets? Do market participants: (i) care about "final" releases of macroeconomic variables; or (ii) form their decisions based on preliminary data; or (iii) instead form their decisions by using vintages of data which they assume correspond to those vintages used by public policy decision-makers?