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The Impact Of Economic News On Financial Markets

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  • Parker, John

Abstract

This paper analyzes the impact of economic news, that is, the difference between economic announcements and what was anticipated, on financial markets. The three contributions of this paper are, first, the market expectation is derived from economic derivative prices that allow a full distribution for the market expectation to be derived. Economic derivatives data better predict financial market movements and also allow for testing whether there is information in the high moments of the distribution. Second, high frequency financial data allows us to test for the optimal window and discover how long it takes financial markets to digest and react to news. Finally, by using a U.S. and a European economic announcement and a wide range of financial markets, this paper compares announcements to show which are important for which markets. I find that high frequency financial data leads to a much bigger and more significant news announcement effect over previous studies that used end-of day data. Further, financial markets react very quickly to news. Unlike other studies that have assumed a 25-30 minute window, I have demonstrated that the announcement window is often as little as just one minute. Using the richness of the economic derivatives-based expectations data I determine when higher moments of the expectations distribution are useful in determining the announcement effect. I also show in which markets, and for which announcements, good news and bad news have asymmetric effects; and, in which markets are most responsive to which announcements. Finally, I have highlighted some of the interesting results that traders or risk managers might want to delve into in more detail.

Suggested Citation

  • Parker, John, 2007. "The Impact Of Economic News On Financial Markets," MPRA Paper 2675, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:2675
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    File URL: https://mpra.ub.uni-muenchen.de/2675/1/MPRA_paper_2675.pdf
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    References listed on IDEAS

    as
    1. Goodhart, C A E, et al, 1993. "New Effects in a High-Frequency Model of the Sterling-Dollar Exchange Rate," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 1-13, Jan.-Marc.
    2. Refet Gürkaynak & Justin Wolfers, 2005. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk," NBER Chapters,in: NBER International Seminar on Macroeconomics 2005, pages 11-50 National Bureau of Economic Research, Inc.
    3. Faust, Jon & Rogers, John H. & Wang, Shing-Yi B. & Wright, Jonathan H., 2007. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1051-1068, May.
    4. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1996. "Economic News and the Yield Curve: Evidence From the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-13, New York University, Leonard N. Stern School of Business-.
    5. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
    6. Fair, Ray C., 2003. "Shock effects on stocks, bonds, and exchange rates," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 307-341, June.
    7. Kim, Suk-Joong & Sheen, Jeffrey, 2001. "Minute-by-minute dynamics of the Australian bond futures market in response to new macroeconomic information," Journal of Multinational Financial Management, Elsevier, vol. 11(2), pages 117-137, April.
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    More about this item

    Keywords

    Economic Derivatives; Economic Announcements; News; Financial Markets; Market Expectations; Real-Time Financial Data;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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