What Types of Events Provide the Strongest Evidence that the Stock

Market is Affected by

Company Specific News

Calum Robertson, Shlomo Geva, Rodney Wolff

AusDM2006

Outline

Introduction Data Methodology Results Conclusions and Future Work

Outline

Introduction Data Methodology Results Conclusions and Future Work

Introduction

The efficient market hypothesis Is stock market an efficient market? Types of News

Macroeconomic news: relatively infrequent, scheduled

Company specific news: more frequent, unpredictable

Purpose of this paper Identify events which occur with a high correlat

ion to the occurrence of real time news

Outline

Introduction Data Methodology Results Conclusions and Future Work

Data – Source and Collecting Period

Source Bloomberg Professional service S&P 100, FTSE 100, and ASX 100

Collecting Period Stock: 1st July 2005 – 1st September 2006 News: 1st May 2005 – 31st August 2006 : the period of data collection : the business time scale

AT

BT

Data – stock dataset

The stock time series

The date time series

The price time series

The volume time series

The tick time series

Data – news dataset

Articles set for a stock (s)

The news time series

Outline

Introduction Data Methodology Results Conclusions and Future Work

Preprocessing (1/3)

The return time series for a stock (s)

The change in volume time series for a stock (s)

Preprocessing (2/3)

The change in ticks time series for a stock (s)

The volatility time series for a stock (s)

Preprocessing (3/3)

Grouped stocks set

Divided time windows

How to define events (1/2)

The Event Point Process (EPP) F – a generalized time series, one of the

return, volume, tick, and volatility time series x – the specified threshold, a threshold of 10%

means that the value should be ≥ log(11/10) or ≤ log(10/11)

How to define events (2/2)

The Event given News Point Process (ENPP)

The Event Without news Point Process (EWPP)

The Ratio of Events Related to News to Events (RERNE)

The Ratio of Events Related to News to Events (RERNE) The probability that the events for the given

parameters are preceded by news, which would imply that news is responsible for these events.

The Likelihood that Events are Related to News (LERN)

The Benchmark A measure of the likelihood of news arriving within

the specified Δτ time.

The Likelihood that Events are Related to News (LERN)

The Event T-Test (ETT)

The Event T-Test (ETT) Test the null hypothesis that the occurrence of

events is not influenced by the occurrence of news

The News T-Test (NTT)

The News T-Test (NTT) Test the null hypothesis that the occurrence of

news before events is the same as the occurrence of news normally

Outline

Introduction Data Methodology Results Conclusions and Future Work

Characteristics of Dataset

Variable US UK AU

Trading Minutes Per Business Day 390 510 360

Trading Minutes Per Typical Business Day Week

1,950 2,550 1,800

Trading Minutes Per Typical Business Day Month

8,125 10,625 7,500

Trading Minutes Per Typical Business Day Year 97,500 127,500 90,000

Average Minutes without a Trade (%) 2.36% 37.65% 50.68%

News Articles in Dataset 293,416 136,627 130,988

Average After Hours News Articles (%) 57.76% 43.22% 76.61%

The Choice of Parameters

Average number of minutes between events - Return

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Return 0.1% 1.14 1..16 1..14 1.36 1.41 1.40

0.2% 1.32 1.35 1.25 1.88 2.02 1.81

0.5% 2.16 2.30 1.85 5.20 6.02 4.90

1.0% 5.27 5.93 3.63 23.34 30.96 20.47

2.0% 23.20 28.64 13.18 187.38 296.73 176.53

5.0% 172.61 452.16 190.78 2,986.46 6,669.99 4,177.65

10.0% 644.54 3,102.39 1,674.15 30,892.04 57,065.47 37,419.38

Average number of minutes between events-Volume

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Volume 10% 1.1 1.1 1.1 1.2 1.1 1.1

20% 1.2 1.2 1.2 1.4 1.2 1.2

50% 1.7 1.7 1.7 2.6 1.6 1.4

100% 3.6 2.7 2.7 7.0 2.5 2.0

200% 13.9 5.3 6.0 35.7 4.8 3.7

500% 80.8 17.4 24.0 269.9 15.0 10.9

1000% 142.8 44.9 74.7 561.4 35.7 27.5

Average number of minutes between events-Ticks

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Ticks 10% 1.2 1.2 1.1 1.3 1.2 1.1

20% 1.6 1.4 1.3 1.8 1.4 1.3

50% 3.6 2.4 2.0 5.2 2.5 1.9

100% 15.2 4.8 4.8 30.8 5.8 4.1

200% 63.0 13.8 22.1 191.4 21.0 15.4

500% 147.8 97.6 280.5 433.9 144.0 117.7

1000% 167.5 533.9 1,417.3 513.2 572.1 360.7

Average number of minutes between events-Volatility

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Volatility 1% 1.0 1.0 1.0 1.0 1.0 1.0

2% 1.0 1.0 1.0 1.0 1.0 1.0

5% 1.1 1.0 1.0 1.3 1.2 1.2

10% 1.8 1.4 1.4 3.0 2.5 2.4

20% 5.8 4.2 3.7 12.9 11.1 9.9

50% 52.4 53.4 40.5 149.9 191.4 148.8

100% 264.7 501.3 401.6 936.3 1,832.4 1,516.9

RERNE and LERN- Return

Event Type

Threshold

RERNE LERN

US UK AU US UK AU

Return 0.1% 29.19% 17.52% 7.01% 101.06% 100.25% 101.84%

0.2% 29.44% 17.80% 6.84% 101.93% 101.87% 99.35%

0.5% 30.64% 18.83% 7.49% 106.08% 107.77% 108.74%

1.0% 34.42% 22.12% 9.80% 119.15% 126.57% 143.24%

2.0% 45.80% 30.90% 19.37% 158.54% 176.86% 281.25%

5.0% 66.35% 55.29% 67.82% 229.66% 316.41% 984.76%

10.0% 60.64% 79.76% 73.44% 209.91% 456.48% 1066.41%

RERNE and LERN- Volume

Event Type

Threshold

RERNE LERN

US UK AU US UK AU

Volume 10% 29.04% 17.37% 6.86% 100.52% 99.41% 99.64%

20% 29.15% 17.26% 6.83% 100.92% 98.79% 99.16%

50% 29.35% 16.88% 6.74% 101.61% 96.60% 97.93%

100% 29.03% 16.23% 6.50% 100.50% 92.91% 94.45%

200% 27.85% 15.08% 5.93% 96.39% 86.32% 86.06%

500% 25.76% 13.64% 5.04% 89.16% 78.07% 73.18%

1000% 22.63% 13.83% 4.83% 78.33% 79.16% 70.19%

RERNE and LERN- Tick

Event Type

Threshold

RERNE LERN

US UK AU US UK AU

Tick 10% 29.19% 17.30% 6.91% 101.04% 98.99% 100.36%

20% 29.51% 17.07% 6.94% 102.15% 97.68% 100.81%

50% 30.51% 16.28% 6.84% 105.62% 93.15% 99.35%

100% 33.03% 14.78% 6.29% 114.33% 84.56% 91.34%

200% 32.75% 12.05% 5.70% 113.35% 68.94% 82.73%

500% 21.22% 10.82% 8.24% 73.47% 61.93% 119.61%

1000% 18.65% 11.80% 13.58% 64.55% 67.55% 197.24%

RERNE and LERN-Volatility

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Volatility 1% 28.90% 17.47% 6.88% 100.05% 100.00% 99.89%

2% 28.96% 17.40% 6.84% 100.24% 99.59% 99.37%

5% 29.48% 17.39% 6.51% 102.06% 99.54% 94.53%

10% 31.01% 17.81% 6.87% 107.35% 101.93% 99.79%

20% 36.36% 21.03% 10.39% 125.87% 120.35% 150.87%

50% 57.31% 37.62% 26.55% 198.37% 215.32% 385.51%

100% 71.13% 61.24% 47.25% 246.23% 350.47% 686.17%

ETT and NTT - Return

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Return 0.1% 87.29% 85.15% 88.81% 97.22% 94.47% 94.46%

0.2% 93.88% 62.19% 66.29% 97.31% 71.68% 71.26%

0.5% 86.30% 42.14% 86.73% 80.35% 14.90% 62.05%

1.0% 55.00% 16.31% 38.16% 8.07% 0.01% 0.00%

2.0% 7.34% 2.02% 4.22% 0.00% 0.00% 0.01%

5.0% 2.15% 0.07% 0.18% 0.00% 0.00% 0.00%

10.0% 25.29% 0.17% 1.17% 5.09% 0.03% 0.38%

ETT and NTT -Volume

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Volume 10% 95.32% 32.23% 88.29% 99.24% 93.65% 98.02%

20% 98.17% 32.21% 83.90% 99.47% 87.16% 94.69%

50% 89.48% 27.67% 84.73% 91.03% 65.75% 86.28%

100% 76.17% 24.78% 73.12% 71.78% 39.02% 55.93%

200% 58.37% 21.54% 51.10% 50.65% 14.75% 8.25%

500% 75.37% 20.21% 25.12% 50.69% 6.16% 0.23%

1000% 77.80% 20.64% 23.18% 86.15% 10.79% 0.28%

ETT and NTT -Ticks

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Ticks 10% 61.02% 49.98% 86.53% 92.69% 87.54% 96.66%

20% 60.42% 47.79% 84.08% 85.10% 72.26% 92.54%

50% 38.56% 47.83% 94.86% 55.47% 34.38% 92.37%

100% 14.21% 47.48% 57.02% 5.52% 12.18% 39.67%

200% 40.53% 45.23% 42.76% 1.84% 11.68% 20.74%

500% 58.37% 50.59% 39.09% 8.91% 97.50% 5.57%

1000% 49.22% 57.04% 2.54% 34.37% 92.87% 0.84%

ETT and NTT -Volatility

Event Type

Threshold

First Period Rest of Day

US UK AU US UK AU

Volatility 1% 36.25% 65.22% 7.26% 99.56% 99.96% 98.78%

2% 47.01% 0.12% 11.14% 98.55% 95.00% 92.48%

5% 93.38% 99.25% 18.48% 95.70% 98.90% 38.24%

10% 99.90% 69.93% 71.52% 99.18% 39.44% 32.14%

20% 63.53% 34.59% 52.36% 2.05% 0.02% 0.00%

50% 10.56% 10.01% 9.26% 0.00% 0.00% 0.00%

100% 13.92% 4.74% 4.57% 0.01% 0.00% 0.00%

Outline

Introduction Data Methodology Results Conclusions and Future Work

Conclusions

The stock market does react to real time news Return and volatility appear to give the most

compelling evidence 5% threshold for all countries 2% and 10% thresholds for the UK and Australian

markets There appears to be some weak evidence that

news effects volume and tick events

Future Work

To determine if volatility events occur differently when the market reaction period is changed

When events and news occur is necessary to establish if the market behaves in a uniform manner

The content of news which the market reacts

Thank you very much

– The End –