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How potent are news reversals?: Evidence from the futures markets

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  • Arjun Chatrath
  • Rohan A. Christie‐David
  • Kiseop Lee

Abstract

A theoretical model is presented, which predicts a heightening in return volatility following a news reversal. A reversal occurs when a value of an economic indicator that is larger than the forecasted value is followed in the following month by a value smaller than the forecasted value, or vice versa. The model also suggests that the effects of a news reversal will be more pronounced early in the monthly macroeconomic news cycle. The predictions of the model for trading activity are less clear. The main predictions of the model were tested employing intraday data for the nearby Treasury bond futures contract. Consistent with the model, the data show significantly greater responses in volatility per standard‐deviation surprise when there is a news reversal, than otherwise. Further, the increased sensitivity in volatility is especially perceptible early in the announcement cycle. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:42–73, 2009

Suggested Citation

  • Arjun Chatrath & Rohan A. Christie‐David & Kiseop Lee, 2009. "How potent are news reversals?: Evidence from the futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(1), pages 42-73, January.
    • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:1:p:42-73
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