News events and price movements Price Effects of Economic and Non-Economic publications in the News media Thomas schuster Institute for Communication and Media Studies einzig University E-mail: Thomas. Schuster(@rz. uni-leipzig de www.tom-schuster.de Draft: May 2003 I would like to thank Andrew Chen, Wolfgang Donsbach, Christopher Gadarowski, Michael Haller Walter Kramer and Volker Wolff for their friendly support and valuable advice
News Events and Price Movements. Price Effects of Economic and Non-Economic Publications in the News Media Thomas Schuster Institute for Communication and Media Studies Leipzig University E-mail: Thomas.Schuster@rz.uni-leipzig.de www.tom-schuster.de Draft: May 2003 I would like to thank Andrew Chen, Wolfgang Donsbach, Christopher Gadarowski, Michael Haller, Walter Krämer and Volker Wolff for their friendly support and valuable advice
News events and Price movements Abstract Numerous empirical studies have demonstrated that asset prices react rapidly, if at all, to news published in the mass media. In many cases, the information has been discounted and prices have already moved upon primary publication through news wires, press releases or firm announcements. Any remaining information is usually quickly priced in after dissemination through the mass media. But not ways: Often enough delayed price adjustments, underreaction as well as overre actions, can be observed after particular news reports have been published. This points to inadequacies in the efficient markets hypothesis as well as in Behavioral Finance theories: Delayed reactions appear too often to be explained away as anomalies"within models of rational pricing. But they appear too eratically to be explained as"normalities" such as in newer models of systematically irrational pricing. In other words: Asset prices frequently do not react to news published in the media. Sometimes they do. The evidence leads to the following conclusion That markets can be efficient and inefficient at the same time
News Events and Price Movements Abstract Numerous empirical studies have demonstrated that asset prices react rapidly, if at all, to news published in the mass media. In many cases, the information has been discounted and prices have already moved upon primary publication through news wires, press releases or firm announcements. Any remaining information is usually quickly priced in after dissemination through the mass media. But not always: Often enough delayed price adjustments, underreactions as well as overreactions, can be observed after particular news reports have been published. This points to inadequacies in the efficient markets hypothesis as well as in Behavioral Finance theories: Delayed reactions appear too often to be explained away as “anomalies” within models of rational pricing. But they appear too eratically to be explained as “normalities” such as in newer models of systematically irrational pricing. In other words: Asset prices frequently do not react to news published in the media. Sometimes they do. The evidence leads to the following conclusion: That markets can be efficient and inefficient at the same time. 2
News events and Price movements News events and Price movements Price Effects of Economic and Non-Economic Publica- tions in the mass media Synchronization was perfect and after the event, commentators in the media shuddered to acknowledge it. The signs of destruction left no room for doubt about the perpetrators intentions: The plan was to hit the core of capitalism symbol and control center of the globalized economy, in a coolly calculated strike. The Northern Tower had just gone up in flames when many TV sta tions were already broadcasting live. At the moment when the twin Towers collapsed, a good hour later, the international public had tuned in. The whole world was watching as, on the sunny morning of September lIth 2001, the World Trade Center was reduced to a pile of rubble The tremendous speed of the realtime-conflict forces a rapid counter- reaction. The response of the world's financial markets is immediate and se- vere: The London Stock Exchange experiences the heaviest crash in its his tory, the FTSe 100-Index falls by 5.7 per cent. The CAC 40-Index in Paris loses 7. 4 per cent. Also in Frankfurt, panic selling is reported and the daX loses 8.5 per cent of its value -one of the largest daily price losses in its his- tory. The Nikkei-lndex in Tokio drops below 10,000 points for the first time since 1984. In return, the prices for gold and crude oil sharply increase. The Dollar plunges. The shock waves of the news from New York shake markets around the globe No doubt: This is an emergency. Decision makers in the central banks are onscious of this fact: The U.S. Federal Reserve Bank, The European Central Bank, the Bank of Japan and many of their colleagues in the international pru dential supervi d regulatory agencies hold crisis talks. They hasten to assure the markets that they will allocate the necessary funds in order to keep
News Events and Price Movements News Events and Price Movements. Price Effects of Economic and Non-Economic Publications in the Mass Media Synchronization was perfect and after the event, commentators in the media shuddered to acknowledge it. The signs of destruction left no room for doubt about the perpetrators' intentions: The plan was to hit the core of capitalism, symbol and control center of the globalized economy, in a coolly calculated strike. The Northern Tower had just gone up in flames when many TV stations were already broadcasting live. At the moment when the Twin Towers collapsed, a good hour later, the international public had tuned in.1 The whole world was watching as, on the sunny morning of September 11th 2001, the World Trade Center was reduced to a pile of rubble. The tremendous speed of the realtime-conflict forces a rapid counterreaction. The response of the world’s financial markets is immediate and severe: The London Stock Exchange experiences the heaviest crash in its history, the FTSE 100-Index falls by 5.7 per cent. The CAC 40-Index in Paris loses 7.4 per cent. Also in Frankfurt, panic selling is reported and the DAX loses 8.5 per cent of its value – one of the largest daily price losses in its history. The Nikkei-Index in Tokio drops below 10,000 points for the first time since 1984.2 In return, the prices for gold and crude oil sharply increase. The Dollar plunges. The shock waves of the news from New York shake markets around the globe. No doubt: This is an emergency. Decision makers in the central banks are conscious of this fact: The U.S. Federal Reserve Bank, The European Central Bank, the Bank of Japan and many of their colleagues in the international prudential supervision and regulatory agencies hold crisis talks. They hasten to assure the markets that they will allocate the necessary funds in order to keep 3
News events and Price movements international payment systems operational and avoid an imminent financial collapse. Interest rates are lowered, and substantial financial aid is dispensed to protect the industries directly concerned from the worst Markets continue to vibrate for quite some time from the psychological shock of the terrorist attacks. In fact. the financial fallout at the target of the attack, Wall Street, is relatively small in comparison: Stockbroking does not even start on September 1 lth and remains closed for several days, which pre- vents immediate shock reactions. Hardly two months later, and thus much faster than many other international stock exchanges in regions far away from the explosion, the U.S.-indices reach the level they had before the attacks. 4 But most other international indices recover in the medium term as well. It seems as if the serious price losses immediately after the attacks, particularly in Europe, were overreactions triggered by the shock Undoubtedly, it is the incredibility of the events as such" that causes these overreactions. However, it is not physical violence alone that defines the sig- nificance of this world event, but also its psychological multiplication through simultaneous global broadcasting in the mass media. The whole world watching, knowing that the rest of the world is watching. Accordi tions are vehement. Although it is impossible to separate the event itself from its media broadcast- the two are inseparably intertwined -, there is a lot to be said for the fact that the specific quality of the cataclysm is due to its deliber- ate realization as a media event. In view of this, it is appropriate to assume an autonomous share of the media in these(over reactions 1 Introduction a whole industry lives on it: Investment magazines, financial networks and business papers, even the general daily press, convey the impression that in- formation selected and presented by them permits conclusions about future movements of the stock markets The media as well as certain market observ ers seem to maintain that business news circulating in public have a signifi- cant, economically realizable and relevant information content. Some even suppose that business news provoke systematic price movements in the finan-
News Events and Price Movements international payment systems operational and avoid an imminent financial collapse. Interest rates are lowered, and substantial financial aid is dispensed to protect the industries directly concerned from the worst.3 Markets continue to vibrate for quite some time from the psychological shock of the terrorist attacks. In fact, the financial fallout at the target of the attack, Wall Street, is relatively small in comparison: Stockbroking does not even start on September 11th and remains closed for several days, which prevents immediate shock reactions. Hardly two months later, and thus much faster than many other international stock exchanges in regions far away from the explosion, the U.S.-indices reach the level they had before the attacks.4 But most other international indices recover in the medium term as well. It seems as if the serious price losses immediately after the attacks, particularly in Europe, were overreactions triggered by the shock. Undoubtedly, it is the incredibility of the events “as such” that causes these overreactions. However, it is not physical violence alone that defines the significance of this world event, but also its psychological multiplication through simultaneous global broadcasting in the mass media. The whole world is watching, knowing that the rest of the world is watching. Accordingly, reactions are vehement. Although it is impossible to separate the event itself from its media broadcast – the two are inseparably intertwined –, there is a lot to be said for the fact that the specific quality of the cataclysm is due to its deliberate realization as a media event.5 In view of this, it is appropriate to assume an autonomous share of the media in these (over)reactions. 1. Introduction A whole industry lives on it: Investment magazines, financial networks and business papers, even the general daily press, convey the impression that information selected and presented by them permits conclusions about future movements of the stock markets. The media as well as certain market observers seem to maintain that business news circulating in public have a significant, economically realizable and relevant information content. Some even suppose that business news provoke systematic price movements in the finan- 4
News events and Price movements cial markets. As it seems, the media are not just observers, they are movers of markets Knowing what will be importantis the slogan of the German edition of the Financial Times. Facts make money" explains the German investment magazine Focus Money. Profit from it' promises US finance television CNBC. Such slogans nurture the idea of news producers as visionary fore- casters or powerful movers of markets. It is in the medias commercial interest to convince the public that their news move stock prices. For the higher the potential of business coverage to forecast or influence stock prices, the higher the benefit that can be expected from intensive media consumption. This again increases the incentive to buy such media products Actual or supposed market manipulations also nurture the idea of the media as influential movers of stock prices: In numerous cases, business journalists or their contact persons in the industry were accused of having influenced in- vestment behavior through well-directed publications of investment tips and exaggerated forecasts of price movements in order to manipulate the prices of certain market values. For some time, such attempts of instrumentalizing the press and television became the content of media coverage themselves. Sup- posed manipulation attempts in financial shows on television received partici lar attention.& On the other hand, many investors had to realize with the breakdown of the New Economy that the potential of the business media to move stock prices is a lot smaller than individual cases of manipulation seem to suggest: While the media were still dreaming of a permanent stock market upswing, the financial markets crashed and shattered the hopes of many investors. But the journalists stuck to their positive message: Even in the middle of the stock market crisis, the number of buy recommendations by far exceeded the number of sell rec- ommendations. Obviously, the business media neither serve as an early warn- ing system nor as reliable forecasters or makers of stock prices. Is the pub lished information not relevant to stock prices after all? Despite self-confident statements of certain media or finance professionals, the actual quality of the interaction of markets and the media is far from being established. On the part of finance studies, the topic has received a lot of at
News Events and Price Movements cial markets. As it seems, the media are not just observers, they are movers of markets. “Knowing what will be important” is the slogan of the German edition of the Financial Times. “Facts make money” explains the German investment magazine Focus Money. “Profit from it” promises US finance television CNBC. Such slogans nurture the idea of news producers as visionary forecasters or powerful movers of markets. It is in the media’s commercial interest to convince the public that their news move stock prices. For the higher the potential of business coverage to forecast or influence stock prices, the higher the benefit that can be expected from intensive media consumption. This again increases the incentive to buy such media products. Actual or supposed market manipulations also nurture the idea of the media as influential movers of stock prices: In numerous cases, business journalists or their contact persons in the industry were accused of having influenced investment behavior through well-directed publications of investment tips and exaggerated forecasts of price movements in order to manipulate the prices of certain market values.6 For some time, such attempts of instrumentalizing the press and television became the content of media coverage themselves.7 Supposed manipulation attempts in financial shows on television received particular attention.8 On the other hand, many investors had to realize with the breakdown of the New Economy that the potential of the business media to move stock prices is a lot smaller than individual cases of manipulation seem to suggest: While the media were still dreaming of a permanent stock market upswing, the financial markets crashed and shattered the hopes of many investors. But the journalists stuck to their positive message: Even in the middle of the stock market crisis, the number of buy recommendations by far exceeded the number of sell recommendations.9 Obviously, the business media neither serve as an early warning system nor as reliable forecasters or makers of stock prices. Is the published information not relevant to stock prices after all? Despite self-confident statements of certain media or finance professionals, the actual quality of the interaction of markets and the media is far from being established. On the part of finance studies, the topic has received a lot of at- 5