News events and Price movements stock prices. Mostly, they have already been anticipated at the time of their publication. May(1994)and Roder(2000b) present similar test results for the German stock exchange. The general maxim seems to be: Good news is no news. "3 Negative information can cause stronger price fluctuations, espe cially in a positive market environment, by increasing insecurity about pros- pects for the future. 3 But even such negative information is mostly processed without greater delays. Outsiders, who buy after the public dissemination, usu- ally do not have time to react to them. The market(re)acts (very) quickly But not always. Stice(1991) proves that the publication method can have an impact on the price response: Accounting income numbers, which do not produce a measurable effect at the time of their obligatory publication, might very well do so when they are published in the Wall Street Journal at a later date. Possibly, this is a violation of the efficient market theory, according to which republications should not produce abnormal price fluctuations. This could hint at autonomous media effects because the newspaper articles do not contain any new information. However, the figures Stice presents on move ments of prices and volumes are hardly significant economically. Moreover, they concern very small companies-and their stock prices usually react more slowly because they are not in the public eye Beaver (1986)already provides evidence for the fact that stock prices and volumes of trade can react to the publication of accounting income numbers He documents abnormal returns and turnovers around the publication date and concludes that the accounting income reports do have an information content Comparable extraordinary trading activities after the publication of accounting income numbers have been shown for smaller companies: Bamber(1986) for example reports above-average turnovers at the time of earnings announce- ments in the Wall Street Journal, particularly for stocks in narrow ts. If the returns are unexpectedly high, the stocks concerned can show increased trading volume. Both Beaver's and Bamber's results indicate that extraordi- nary trading activities come to an end very quickly Rapidity in information processing seems to be the norm in the majority of ases. Announcements of data concerning the national economy provoke par- ticularly rapid reactions on the markets- if they react at all. For example in- flation numbers: Schwert(1981)shows that the stock market often reacts only
News Events and Price Movements stock prices. Mostly, they have already been anticipated at the time of their publication. May (1994) and Röder (2000b) present similar test results for the German stock exchange. The general maxim seems to be: “Good news is no news.” 31 Negative information can cause stronger price fluctuations, especially in a positive market environment, by increasing insecurity about prospects for the future.32 But even such negative information is mostly processed without greater delays. Outsiders, who buy after the public dissemination, usually do not have time to react to them. The market (re)acts (very) quickly. But not always. Stice (1991) proves that the publication method can have an impact on the price response: Accounting income numbers, which do not produce a measurable effect at the time of their obligatory publication, might very well do so when they are published in the Wall Street Journal at a later date. Possibly, this is a violation of the efficient market theory, according to which republications should not produce abnormal price fluctuations. This could hint at autonomous media effects because the newspaper articles do not contain any new information. However, the figures Stice presents on movements of prices and volumes are hardly significant economically. Moreover, they concern very small companies – and their stock prices usually react more slowly because they are not in the public eye. Beaver (1986) already provides evidence for the fact that stock prices and volumes of trade can react to the publication of accounting income numbers: He documents abnormal returns and turnovers around the publication date and concludes that the accounting income reports do have an information content. Comparable extraordinary trading activities after the publication of accounting income numbers have been shown for smaller companies: Bamber (1986) for example reports above-average turnovers at the time of earnings announcements in the Wall Street Journal, particularly for stocks in narrow markets. If the returns are unexpectedly high, the stocks concerned can show increased trading volume. Both Beaver's and Bamber's results indicate that extraordinary trading activities come to an end very quickly. Rapidity in information processing seems to be the norm in the majority of cases. Announcements of data concerning the national economy provoke particularly rapid reactions on the markets – if they react at all. For example inflation numbers: Schwert (1981) shows that the stock market often reacts only 11
News events and Price movements weakly to the release of inflation rates. Pearce and roley(1985)also find only very weak evidence of price reactions to inflation rates. Jain(1988 )repli cates these results: Inflation rate, industrial production or unemployment rate the release of these statistics mostly does not lead to any remarkable change in stock prices. If corresponding effects occur, they do so very quickly, gener- ally within one hour. After that, the price effect has been exhausted Interest and currency markets react even more quickly than the stock mar kets. Ederington and Lee(1993 and 1995) demonstrate that in these markets price reactions begin to set in shortly after the publication of macroeconomic data. The main price adjustments take place within only one minute. " I Trading profits based on the initial reaction basically disappear within this pe- riod", the authors say. Andersen, Bollerslev, Diebold and Vega(2002)reveal how surprising macro-economic information can influence exchange rates The rates react abruptly with negative information provoking much stronger reactions than positive information. In general: Exchange rates respond in- stantly to the release of economic information Maloney and Mulherin(1998)show in a case study on the explosion of the Challenger space shuttle in 1986 that even particularly surprising non-eco- nomic news is rapidly processed by the markets: Within 13 minutes of the agency report about the crash of the space shuttle in the Dow Jones News Wire, which was published eight minutes after the explosion, the stocks of se- veral companies involved in the production of the shuttle went down. The price of one particular stock was hit especially hard. While the stock market prices of the other companies quickly recovered, this stock continued to go down in value during the day It turned out several weeks later that this was the company responsible for the production error that had caused the acci-
News Events and Price Movements weakly to the release of inflation rates.33 Pearce and Roley (1985) also find only very weak evidence of price reactions to inflation rates. Jain (1988) replicates these results: Inflation rate, industrial production or unemployment rate – the release of these statistics mostly does not lead to any remarkable change in stock prices. If corresponding effects occur, they do so very quickly, generally within one hour.34 After that, the price effect has been exhausted.35 Interest and currency markets react even more quickly than the stock markets. Ederington and Lee (1993 and 1995) demonstrate that in these markets, price reactions begin to set in shortly after the publication of macroeconomic data. The main price adjustments take place within only one minute. “[…] Trading profits based on the initial reaction basically disappear within this period“, the authors say.36 Andersen, Bollerslev, Diebold and Vega (2002) reveal how surprising macro-economic information can influence exchange rates. The rates react abruptly with negative information provoking much stronger reactions than positive information. In general: Exchange rates respond instantly to the release of economic information.37 Maloney and Mulherin (1998) show in a case study on the explosion of the Challenger space shuttle in 1986 that even particularly surprising non-economic news is rapidly processed by the markets: Within 13 minutes of the agency report about the crash of the space shuttle in the Dow Jones News Wire, which was published eight minutes after the explosion, the stocks of several companies involved in the production of the shuttle went down. The price of one particular stock was hit especially hard. While the stock market prices of the other companies quickly recovered, this stock continued to go down in value during the day. It turned out several weeks later that this was the company responsible for the production error that had caused the accident.38 12