Parker, John (2007): The Impact Of Economic News On Financial Markets.
Download (578Kb) | Preview
This paper analyzes the impact of economic news, that is, the difference between economic announcements and what was anticipated, on financial markets.
The three contributions of this paper are, first, the market expectation is derived from economic derivative prices that allow a full distribution for the market expectation to be derived. Economic derivatives data better predict financial market movements and also allow for testing whether there is information in the high moments of the distribution. Second, high frequency financial data allows us to test for the optimal window and discover how long it takes financial markets to digest and react to news. Finally, by using a U.S. and a European economic announcement and a wide range of financial markets, this paper compares announcements to show which are important for which markets.
I find that high frequency financial data leads to a much bigger and more significant news announcement effect over previous studies that used end-of day data. Further, financial markets react very quickly to news. Unlike other studies that have assumed a 25-30 minute window, I have demonstrated that the announcement window is often as little as just one minute. Using the richness of the economic derivatives-based expectations data I determine when higher moments of the expectations distribution are useful in determining the announcement effect. I also show in which markets, and for which announcements, good news and bad news have asymmetric effects; and, in which markets are most responsive to which announcements. Finally, I have highlighted some of the interesting results that traders or risk managers might want to delve into in more detail.
|Item Type:||MPRA Paper|
|Original Title:||The Impact Of Economic News On Financial Markets|
|Keywords:||Economic Derivatives; Economic Announcements; News; Financial Markets; Market Expectations; Real-Time Financial Data|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies|
|Depositing User:||John Parker|
|Date Deposited:||12. Apr 2007|
|Last Modified:||12. Feb 2013 19:51|
Andersen, Torben G., Bollerslev, Tim, Diebold, Francis X., Vega, Clara, (2002) “Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange” NBER Working Paper Series, NBER Working Paper No. 8959, May 2002.
Balduzzi, P., Elton, E.J., Green, T.C., (2001) “Economic News and Bond Prices: Evidence from the U.S. Treasury Market”, Journal of Financial and Quantitative Analysis, Vol. 36, pp.523-543.
Baumohl, Bernard, (2004) The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities, Wharton School Publishing. Fair, R., (2003) “Shock Effects on Stocks, Bonds and Exchange Rates”, Journal of International Money and Finance, Vol. 22, pp.307-341.
Faust, Jon, Rogers, John H., Wang, Shing-Yi B., Wright, Jonathan H., (2003) “The high-frequency response of exchange rates and interest rates to macroeconomic announcements” U.S. Board of Governors of the Federal Reserve System, International Finance Discussion Papers, number 784.
Federal Reserve Board of San Francisco, (2006) “New Uses for New Macro Derivatives” FRBSF Economic Letter, 2006-21; August 25.
Goodhart, C.A.E., Hall, S.G., Henry S.G.B. and Pesaran, B.. (1993) “News Effects in a High-Frequency Model of the Sterling-Dollar Exchange Rate,” Journal of Applied Econometrics, Vol. 7, pp. 199-211.
Gürkaynak, Refet S., Wolfers, Justin, (2006) “Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk” NBER Working Paper Series, NBER Working Paper 11929, January 2006.
Kim, Suk-Joong, Sheen, Jeffrey, (2001) “Minute-by-minute dynamics of the Australian bond futures market in response to new macroeconomic information” Journal of Multinational Financial Management, Vol. 11, pp. 117-137.
Parker, John C., Li, Huirong (CoCo), “How Bad is Bad News; How Good is Good News?” unpublished research paper available from the author (firstname.lastname@example.org) upon request.
Pearce, Douglas K., Roley, V. Vance, (1985) “Stock Prices and Economic News”, Journal of Business, Vol. 58, No. 1 (January), pp. 49-67
Ross, S.A. (1976) “The Arbitrage Theory of Asset Pricing”, Journal of Economic Theory, Vol. 13, pp. 341-360.