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The persistent effects of a false news shock

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  • Carlos Carvalho
  • Nicholas Klagge
  • Emanuel Moench

Abstract

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the parent company's stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the "news" had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. We use this natural experiment and a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation confidence band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at exactly the level predicted by the asset-pricing model. We also document that the false news shock had a persistent effect on the stock prices of other major airline companies.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 374.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:374

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Keywords: Information theory ; Stock - Prices;

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References

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  1. James Dow, 2004. "Is Liquidity Self-Fulfilling?," The Journal of Business, University of Chicago Press, vol. 77(4), pages 895-908, October.
  2. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174539, HAL.
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  4. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, 02.
  5. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
  6. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  7. Paul C. Tetlock & Maytal Saar-Tsechansky & Sofus Macskassy, 2008. "More Than Words: Quantifying Language to Measure Firms' Fundamentals," Journal of Finance, American Finance Association, vol. 63(3), pages 1437-1467, 06.
  8. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, 06.
  9. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
  10. Hilscher, Jens Dietrich & Campbell, John Y. & Szilagyi, Jan, 2011. "Predicting Financial Distress and the Performance of Distressed Stocks," Scholarly Articles 9887619, Harvard University Department of Economics.
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Cited by:
  1. Saif Ullah & Nadia Massoud & Barry Scholnick, 2014. "The Impact of Fraudulent False Information on Equity Values," Journal of Business Ethics, Springer, vol. 120(2), pages 219-235, March.
  2. Peter Koudijs, 2013. "The boats that did not sail: Asset Price Volatility and Market Efficiency in a Natural Experiment," NBER Working Papers 18831, National Bureau of Economic Research, Inc.

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