On the shoulders of others: What others have said about the Announcement Effect (Part 2 of 2)

It is not news that news moves financial markets. This blog will publish research on how, when, why, and which news moves what financial markets.

All references cited below will be published in full in a separate post.

Gürkaynak and Wolfers (2006) use expectations data from economic derivatives, which they show, is an improvement over survey data used almost universally by all other authors. Gürkaynak and Wolfers (2006) conclude that “The evidence presented … shows that economic derivatives option prices are accurate and efficient predictors of the densities of underlying events” (p. 29). That “the option prices that we observe in this market are a reasonable approximation to the risk-neutral distribution” (p. 40). And finally, that “… positive shocks to non-farm payrolls, business confidence and retail trade are positive shocks to wealth, while higher initial claims is a negative shock. … the non-farm payrolls surprise is easily the most important shock. The coefficient is also directly interpretable: a one standard deviation shock to nonfarm payrolls raises wealth (measured by the percentage change in the S&P 500 in a 30-minute window) by 0.37% and the 95% confidence interval extends from +0.17% to +0.54%.” (pp. 34-35)

Fair’s (2003) work also considers high frequency intra-day data on a range of asset prices over a long period (1982 to 1999). Using the reverse methodology to the above and previous authors who look at asset prices around announcements, Fair identifies occasions on which the five-minute change in asset prices exceeded 0.75 percentage points, and then does a newswire searches to match to an event that occurred at that time. The events are often U.S. macroeconomic announcements.

Several studies have linked economic news to exchange rates jumps. One example, using one year of high frequency dollar-sterling exchange rates is Goodhart, Hall, Henry, and Pesaran (1993) who link the news of a U.S. trade figure announcement and a U.K. interest rate change to an exchange rate jump.

Bond markets research includes Balduzzi, Elton and Green (2001) who use intraday data from the inter-dealer government bond market to investigate macroeconomic announcements on prices, trading volume, and bid-ask spreads. They find that the surprise in 17 news releases has a significant impact on the price of at least one of the following: a three-month bill, a two-year note, a 10-year note, and a 30-year bond. Their estimated effects vary significantly according to maturity. The news can explain a substantial fraction of price volatility after the announcements, and the price adjustment to news generally occurs within one minute after the announcement. By contrast, they document significant and persistent increases in volatility and trading volume after the announcements. Bid-ask spreads, on the other hand, widen at the time of the announcements, but then revert to normal values after five to 15 minutes.