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The persistent effects of a false news shock


  • Carlos Carvalho
  • Nicholas Klagge
  • Emanuel Moench


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.

Suggested Citation

  • Carlos Carvalho & Nicholas Klagge & Emanuel Moench, 2009. "The persistent effects of a false news shock," Staff Reports 374, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:374

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    References listed on IDEAS

    1. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, February.
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    11. Ben R. Marshall & Nuttawat Visaltanachoti & Genevieve Cooper, 2014. "Sell the rumour, buy the fact?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 237-249, March.
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    Cited by:

    1. Joel Peress, 2014. "The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes," Journal of Finance, American Finance Association, vol. 69(5), pages 2007-2043, October.
    2. Fabrizio Germano & Francesco Sobbrio, 2016. "Opinion dynamics via search engines (and other algorithmic gatekeepers)," Economics Working Papers 1552, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2017.
    3. 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.
    4. 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.

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    Information theory ; Stock - Prices;

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