Macroeconomic news announcements and price discovery: Evidence from Canadian–U.S. cross-listed firms

This study employs macroeconomic news announcements as a proxy for new information arrivals and examines their impact on price discovery. We compare the price discovery of 38 Canadian companies listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE) for the period 2004–2011. First, we observe that price discovery shifts significantly during macroeconomic news announcement days. Second, the NYSE becomes more important in terms of price discovery, regardless of the origin of the news. Third, we examine the relation between price discovery and market microstructure variables. After controlling for liquidity shocks, we find that the impact of news announcements persists. Intraday analyses of price discovery on periods surrounding news releases further support these findings. Overall, our findings suggest that there is a difference in information-processing capability of the two markets, with the U.S. market being better at processing information than the Canadian market during macroeconomic news announcements.     

Price discovery in the round-the-clock U.S. Treasury market

We evaluate the efficacy of price discovery in the round-the-clock U.S. Treasury market. Using a comprehensive intraday database, we explore informational role of trades over the 24-hour day. We find that information asymmetry is generally highest in the preopen period and lowest in the postclose period. Information asymmetry in the overnight period is comparable to that in the regular trading period. However, on days with macroeconomic announcements, information asymmetry peaks shortly after the news release at 8:30. Moreover, information asymmetry is higher on Monday morning and higher immediately before than after the open of U.S. Treasury futures trading. Although volume is low after hours and trading cost is relatively high, overnight trading generates significant price discovery. Results suggest that overnight trading activity is an important part of the Treasury price discovery process.     

Short sale constraints,heterogeneous interpretations,and asymmetric price reactions to earnings announcements

This study tests Miller’s (1977) overpricing hypothesis from a new angle. Specifically, we investigate the effects of heterogeneous interpretations on price reactions to earnings announcements. We find that the difference between good news and bad news earnings response coefficients increases with the degree of heterogeneous interpretations in the presence of short sale constraints. This pattern is more pronounced when short sale constraints are more binding. These findings support the notion that, under short sale constraints, stock prices selectively incorporate more optimistic opinions rather than the average opinion of all investors. Therefore, reducing short sale constraints should facilitate price discovery and improve price efficiency. This study complements recent studies examining the joint effect of short sale constraints and ex ante opinion divergence on price reactions to earnings announcements.     

The intraday speed of stock price adjustment to major dividend changes: Bid−ask bounce and order flow imbalances

This paper examines the intraday stock price reaction to substantial shifts in dividend policy. The results indicate the price reaction to be slower than that previously found by Patell and Wolfson (1984) and closer to that found with earnings announcements by Woodruff and Senchack (1988). Possible order flow imbalances are examined by looking at the proximity of transaction prices to contemporaneous bid and ask quotes. While order flow imbalances are evident for bad news announcements, this is not the case for the dividend increase sample. This is interpreted as evidence that the price reaction to major dividend increases are in general anticipated. Fifteen minute holding period returns are computed to measure the movement of equilibrium prices during the announcement period. Results show a rapid adjustment of prices to positive announcements with adjustment to negative announcements taking up to 75 minutes. Finally, fifteen minute lagged bid—ask returns are calculated to determine whether an investor could respond to the announcement and earn positive returns. These results are found to be dependent on the transaction cost assumptions being made.     

News announcements and price discovery in foreign exchange spot and futures markets

This paper studies competition in price discovery between spot and futures rates for the EUR–USD and JPY–USD markets around scheduled macroeconomic announcements. Using both the information shares approach and the common factor component weight approach for futures prices from the Chicago Mercantile Exchange (CME), as well as deal prices from spot trading on the Electronic Broking Services (EBS), we gauge how foreign exchange spot and futures markets respond to news surprises. The results show that the spot rates provide more price discovery than do the CME futures rates overall; however, the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases.     

Options trading volume and stock price response to earnings announcements

We examine the effect of options trading volume on the stock price response to earnings announcements over the period 1996–2007. Contrary to previous studies, we find no significant difference in the immediate stock price response to earnings information announcements in samples split between firms with listed options and firms without listed options. However, within the sample of firms with listed options stratified by options volume, we find that higher options trading volume reduces the immediate stock price response to earnings announcements. This conforms with evidence that stock prices of high options trading volume firms have anticipated and pre-empted some earnings information in the pre-announcement period. We also find that higher abnormal options trading volume around earnings announcements hastens the stock price adjustment to earnings news and reduces post-earnings announcement drift.     

The effects of capital structure change on security prices: A study of exchange offers

This study considers the impact of capital structure change announcements on security prices. Statistically significant price adjustments in firms' common stock, preferred stock and debt related to these announcements are documented and alternative causes for these price changes are examined. The evidence is consistent with both corporate tax and wealth redistribution effects. There is also evidence that firms make decisions which do not maximize stockholder wealth. In addition, a new approach to testing the significance of public announcements on security returns is presented.     

How Markets Process Information: News Releases and Volatility

We examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets. We find these announcements are responsible for most of the observed time-of-day and day-of-the-week volatility patterns in these markets. While the bulk of the price adjustment to a major announcement occurs within the first minute, volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours. Nonetheless, these subsequent price adjustments are basically independent of the first minute's return. We identify those announcements with the greatest impact on these markets.     

Religious holidays,investor distraction,and earnings announcement effects

We examine price reactions to U.S. firms’ earnings announcements during Easter week in order to analyze whether and how the religious holiday calendar impacts investors’ information processing. We find that there is an asymmetric pattern of immediate and delayed responses to earnings surprises experienced during Easter, entailing similar immediate reactions to both good and bad news and a stronger delayed response to bad news. Moreover, local religious characteristics affect investor’s response to firm news. The results are consistent with a religion-induced distraction effect on investors’ information processing ability. We also show that this effect can form the basis for a profitable trading strategy. The findings highlight the importance of religion for firms’ information environment and for the local component of stock prices.     

Macroeconomic announcements and price discovery in the foreign exchange market

This study shows that the dominance of the overlapping trading hours of London and New York in the price discovery of the EUR/USD and USD/JPY markets only applies on days with U.S. announcements. Different from Cai et al. (2008) and Wang and Yang (2011), we highlight the informational advantage of local traders at the arrival of macroeconomic announcements in the local market, and find that macroeconomic announcements affect the pattern of price discovery across different markets, consistent with Chen and Gau (2010) and Jiang et al. (2012). We also examine changes in information shares before and after the announcement. A significant increase in price discovery before the announcement suggests the possibility of information leakage, while enhanced price discovery efficacy after the announcement suggests that prices gradually adjust to new information, not just immediately respond to the arrival of announcements.     

How is macro news transmitted to exchange rates?

Macro news can affect currency prices directly and indirectly via order flow. Past research shows that the direct effects of scheduled macro news account for less than 10% of daily price variance. This paper shows that the arrival of macro news can account for more than 30% of daily price variance. Two features of our analysis account for this finding: (1) We consider the broad spectrum of macro news items that market participants observe, not just scheduled announcements. (2) We allow the arrival of news to affect prices indirectly via its impact on the volatility of order flow. Our analysis shows that order flow variations contribute more to currency price dynamics following the arrival of public macro news than at other times. This is not consistent with news effects being common knowledge that is impounded in price directly. Roughly two-thirds of the total effect of macro news on the DM/$ exchange rate is transmitted via order flow.     

Impact of macroeconomic news on metal futures

This paper uses intra-day data for the period 2002 through 2008 to examine the intensity, direction, and speed of impact of US macroeconomic news announcements on the return, volatility and trading volume of three important commodities - gold, silver and copper futures. We find that the response of metal futures to economic news surprises is both swift and significant, with the 8:30 am set of announcements - in particular, nonfarm payrolls and durable goods orders - having the largest impact. Furthermore, announcements that reflect an unexpected improvement in the economy tend to have a negative impact on gold and silver prices; however, they tend to have a positive effect on copper prices. In comparison, realized volatility and volume for all three metals are positively influenced by economic news. Finally, there is evidence that several news announcements exert an asymmetric impact on market activity variables.     

Economic News and the Impact of Trading on Bond Prices

This paper studies the impact of trading on government bond prices surrounding the release of macroeconomic news. The results show a significant increase in the informational role of trading following economic announcements, which suggests the release of public information increases the level of information asymmetry in the government bond market. The informational role of trading is greater after announcements with a larger initial price impact, and the relation is associated with the surprise component of the announcement and the precision of the public information. The results provide evidence that government bond order flow reveals fundamental information about riskless rates.     

Insider trading,future earnings,and post-earnings announcement drift

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.     

RESPONSE OF STOCK PRICES TO MONEY SUPPLY ANNOUNCEMENTS: AUSTRALIAN EVIDENCE

This paper extends the literature on the money supply announcement effect by examining the response of stock prices to the monthly announcements of the money supply made in Australia. The unexpected component of the money supply change is identified using both a market based survey of expectations and rolling ARIMA time series models. The analysis is further extended to examine the impact of the money supply announcements during the period of monetary target-ting; the cross-sectional impact of the announcements across various stock price indices and the pre- and post-announcement responses of stock prices. The results documented show no evidence of a significant stock price response to the money supply announcements in Australia.     

The impact of Financial Times Deutschland news on stock prices: post-announcement drifts and inattention of investors

In this paper, we analyze the impact of Financial Times Deutschland (FTD) news on stock prices and trading volumes. Based on a sample of all news about German DAX, MDAX, and SDAX companies published in the news section of the FTD between 2006 and 2010, our results show that articles that contain positive (negative) information are associated with significantly positive (negative) abnormal returns and abnormal trading volumes around their publication. Furthermore, our results show an initial underreaction to these articles and subsequent post-publication drift. Based on the inattention hypothesis, we show that high-attention news (proxied by abnormal trading volume) almost instantaneously moves stock prices to their new valuation levels, whereas the price adjustment process takes much longer following low-attention news. Our results also hold within multivariate regressions where we additionally control for stock-specific characteristics (e.g., institutional ownership, size, and price-to-book ratio) as well as other attention-grabbing events (as measured by ad hoc announcements and cover-page news articles). Finally, we show that results primarily hold in the non-crisis period.     

Trading Halts and Price Discovery

Trading halts have their proponents and opponents. Recent literature has examined the benefits of halts, if any, by studying the consequences of halts on order flow and price volatility. This study complements existing literature by examining the consequences of trading halts on price discovery. Our results indicate that stock price adjustments surrounding trading halts are conditioned on the underlying event that caused the halt. The weighted price contributions of all subsamples are concentrated in the halt period and some subsamples show significant price contribution in the pre-halt period as well. We find minimal evidence of price discovery continuing after the halt is removed. In addition, cross-sectional analysis shows that price discovery in the pre-halt and halt periods are more pronounced for larger firms and for firms with specific news events.      

The impact of economic news on bond prices: Evidence from the MTS platform

Although there is an extensive literature on the impact of macroeconomic announcements on asset prices, the bond market has received less attention than the foreign exchange and equity markets, even less if we consider the European market. This paper uses high-frequency intra-day data over a three-year period to investigate the impact of regularly scheduled macroeconomic news and monetary policy announcements on the returns of the Italian government bond market, the largest one in the Euro-zone. With respect to the previous papers, we use a much broader set of announcements, 68, and a relatively novel dataset (MTS). We find that 25 news have a significant impact on bond returns and that almost all announcements are incorporated into prices within 20 min from the release.     

What drives the market value of firms in the defense industry?

This article assesses the relative importance of different types of news in driving significant stock price changes in the defense industry. We implement a systematic event study with the 58 largest publicly listed companies in the defense industry, over the time period 1995-2005. We first identify, for each firm, the statistically significant abnormal returns over the time period. Then, we look for information releases likely to cause such stock price movements. Most of the key drivers in the defense industry are the same as in other industries (key role of formal earnings announcements and analysts’ recommendations) but we also identify some specific features, in particular the influence of geopolitical events and the relevance and frequency of bids and contracts on stock prices. Finally, we examine the impact of the September 11 terrorist attacks on defense firms.     

How do commodity futures respond to macroeconomic news?

This paper investigates the impact of seventeen US macroeconomic announcements on two broad and representative commodity futures indices. Based on a large sample from 1989 to 2005, we show that the daily price response of the CRB and GSCI commodity futures indices to macroeconomic news is state-dependent. During recessions, news about higher (lower) inflation and real activity lead to positive (negative) adjustments of commodity futures prices. In contrast, we find no significant reactions during economic expansions. We attribute this asymmetric response to the state-dependent interpretation of macroeconomic news. Our findings are robust to several alternative business cycle definitions.