# Measuring the surprise element of policy actions

Dear fellow community members,

Here is the excerpt from Bernanke and Kuttner (2005) that I need to apply to gather my data.

"A measure of the surprise element of any specific change in the Federal funds target can be derived from the change in the futures contract's price relative to the day prior to the policy action. For an event taking place on day d of month m, the unexpected, or "surprise", target funds rate change can be calculated from the change in the rate implied by the current-month futures contract. But because the contract's settlement price is based on the monthly average Federal funds rate, the change in the implied futures rate must be scaled up by a factor related to the number of days in the month affected by the change,

$$\Delta i^u = \frac{D}{D-d} (f_{m,d}^0 - f_{m,d-1}^0)$$

where $\Delta i^u$ is the unexpected target rate change, $f_{m,d}^0$ is the current-month futures rate, and $D$ is the number of days in the month. The expected component of the rate change is defined as the actual change minus the surprise, or

$$\Delta i^e = \Delta i - \Delta i^u$$

."

I need help applying the above formulas to the Australian Futures Index below. Say there is a surprise change by the RBA (Reserve Bank of Australia) on September 16, what would be the $\Delta i^u$ and $\Delta i^e$? Am i using the right data to measure this? Any help would be very much appreciated as I am very new to finance. Your chart shows the prices of stock index futures. That is not what the text is talking about. The text is talking about futures on the overnight federal funds rate. In the US this would be FFU6 for September. I dont think an exact Australian equivalent exists.

• Hi @dm63 thank you for your answer. 2 questions: 1. Seeing your suggestion about the FFU6, I found that Australia has the 30-day intrabank cash rate futures (quandl.com/data/CHRIS/…). Can i use this instead? 2. You mentioned I can't use the stock index futures, was it because the prices there do not incorporate the market's expectation of future rates, while prices in FFU6 do?
– umm
Sep 17 '16 at 13:01
• Yes, I believe that is the analogous futures contract for Australia.
– dm63
Sep 18 '16 at 11:39
• On your second question, the futures contract needs to be directly related to the policy rate controlled by the central bank for this formula to work. The underlying instrument for the contract you specified is the Australian overnight cash rate , which is indeed the policy rate for the Reserve Bank of Australia.
– dm63
Sep 18 '16 at 11:42
• Thank you. My final question: On the website above for Australian intrabank cash rate futures, there was a surprise cut by the RBA in May 3 (25 basis point cut), the future price on the 2nd of May was 92.18 and on the 3rd of May became 92.28. Using the formula above, the unexpected change (surprise for the market) then is 0.11 (d=3d=3) which equals to 11 basis points? In other words, the market already expected a 14 basis points cut (25-11)?
– umm
Sep 21 '16 at 1:41
• That looks right
– dm63
Sep 22 '16 at 9:25