Three Essays on Public Information and Security Prices.

Abstract

This dissertation includes three essays examining the role of public information in financial markets. The first essay examines informed trading before natural gas inventory announcements. Natural gas futures prices start moving in the “right” direction about 90 minutes before the announcement. The empirical results show that the difference between the median forecast of analysts with high historical forecasting accuracy and the consensus forecast can be used to predict inventory surprises and some of the pre-announcement drift. Because both individual analyst forecasts and consensus are available to Bloomberg subscribers prior to official release time, our results suggest that informed trading before the announcement may be driven by superior forecasting based on public information rather than by information leakage. The second essay investigates the effect of public political information on financial markets in the setting of the UK referendum on EU membership. It shows that an increase in the probability of Brexit, as reflected in online betting odds, leads to lower stock prices and higher market uncertainty. However, the likelihood of Brexit moved financial asset prices and volatilities only on days characterized by high investor attention to the Brexit topic. This finding indicates that markets react to new political information only when investors pay attention to it. The third essay investigates whether and why information extracted from social media moves stock returns. It shows that firm-level Twitter sentiment predicts stock returns without subsequent reversals, suggesting that tweets contain novel information about firms’ fundamentals. Furthermore, the paper provides four examples of value relevant information embodied in Twitter sentiment. Specifically, Twitter sentiment has forecasting power on analyst recommendation revision, target price changes, IPO underpricing and earning surprise.