Thursday, November 15, 2007

Good news is no news

More interesting research from Erasmus University Rotterdam, with econometrics professor Dick van Dijk presenting new work on the impact of news events on stock prices (broadly the area I covered in my dissertation).

van Dijk studied short-term price movements on the New York stock exchange in response to unexpected interest rate announcements. He found an interesting asymmetry: good news (ie, a rate cut) leads to a response which depends on the weight of the news (the amount by which interest rates are cut; bad news (a rate increase) creates a response that does not reflect the magnitude of the change. As theory predicts, expected rate change announcements create no significant response.

By tracking price movements on a minute-by-minute basis, van Dijk also identifies the speed with which prices can move in response to unexpected news: an unexpected interest rate adjustment of 0.25% leads to a return of more than 1% within five minutes.



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