Exogenous News Research Articles

Conventional and Islamic stock market liquidity and volatility during COVID 19

ABSTRACT The coronavirus pandemic has impacted several stock markets worldwide. Among other countries, the US has endured a significant impact of the pandemic, with over 605,000 deaths. This study investigates the effect of COVID-19 on the liquidity and volatility of the US conventional and Islamic stock indexes to assess their efficiency in a linear and nonlinear frammeworks. We use different stock market data (stock prices and trading volumes) and COVID-19 statistics. In particular, we specify liquidity and volatility differently, compute the speed of COVID-19 transmission, rely on robust linear and nonlinear regressions before and during the pandemic to determine different forms of coronavirus effects. The study finds that both liquidity and volatility (regardless of the proxy under consideration) exhibit an important time variation. Second, we find that the variation of contamination and death speeds related to the pandemic has been nonlinearly driving market trading, liquidity, and volatility, suggesting a significant reaction of stock market to exogenous news related to the coronavirus outbreak and inefficiency of these markets. Considering this dependency is crucial to improving the forecasting of stock market dynamics. Further, we find that Islamic funds are not more resilient than conventional funds towards the pandemic.

Market instability and technical trading at high frequency: Evidence from NASDAQ stocks

The promotion of financial stability is the mission of central banks and market authorities. This mission is more difficult to accomplish when trading activity is associated with financial instability in the form of intraday price jumps. While the literature has widely shown that exogenous news releases trigger these jumps, very little is known about the consequences of endogenous technical trading on market instability. Using high-frequency 5-min data on 460 NASDAQ stocks from February to September 2017, we provide new evidence that sharp price movements during the day are also triggered by technical trading around special market configurations. When technical trading activity dominates, intraday price jumps are detected more frequently, and their direction becomes significantly predictable, particularly in small caps and in the energy sector. Our results support the view that the explanations for intraday market instability are not limited to news releases.

Can a better informed listener be easier to persuade?

We study the impact of exogenous news on the classic Bayesian persuasion problem. The sender supplies information over multiple periods, but is unable to commit at the onset to the information that she will supply in periods ahead. A tension then emerges between the sender and her future self. We show that by resolving this tension, more informative news can make the sender better off.

Can a Better Informed Listener be Easier to Persuade?

We study the impact of exogenous news on the classic Bayesian persuasion problem. The sender supplies information over multiple periods, but is unable to commit at the onset to the information that she will supply in periods ahead. A tension then emerges between the sender and her future self. We show that by resolving this tension, more informative news can make the sender better off.

Strategic real options

I study hidden investment in quality in a dynamic persuasion game. A seller, such as a project manager or startup company, controls an asset and wants to convince a potential buyer, such as an acquiring company or a regulator, that it has high quality. The buyer observes exogenous news with quality-dependent drift and holds a call option on the asset; the seller is privately informed about quality and can wait (at a flow cost), upgrade (at a fixed cost) or exit the market.For low upgrade costs, multiple equilibria exist and exhibit novel reputational dynamics — resetting barriers and skew Brownian motion, a generalization of a reflected stochastic process. In one type of equilibrium, a seller with low quality waits until his reputation hits “rock bottom” and then upgrades with some probability, inducing upward reputational jumps in equilibrium; the seller may exit at an intermediate reputation. In a second type, the low quality seller mixes over exiting at low reputations and upgrading in an intermediate “sweet spot” region. The results suggest a social benefit to setting high expectations for effort when agents start with low reputations and help explain why agents respond to adversity in drastically different ways across environments.

Intensive and extensive margins of mining and development: Evidence from Sub-Saharan Africa

What are the economic consequences of mining in Sub-Saharan Africa? Using a panel of 3,635 districts from 42 Sub-Saharan African countries for the period 1992 to 2012 we investigate the effects of mining on living standards (measured by night-lights and household/cohort characteristics from Demographic and Health Surveys) and public service provisions (from Afrobarometer). Night-lights increase in mining districts when mineral production expands (intensive margin), but large effects are mainly associated with new discoveries and new production (extensive margin). We identify the effect by carefully choosing feasible but not yet mined districts as a control group. In addition, we exploit first, single-first, giant and major discoveries as exogenous news shocks. Mines in Africa exhibit enclave characteristics as we find little evidence of significant spillovers to other districts.

An Agent‐Based Model of a Pricing Process with Power Law, Volatility Clustering, and Jumps

In this paper, we propose a new model of security price dynamics in order to explain the stylized facts of the pricing process such as power law distribution, volatility clustering, jumps, and structural changes. We assume that there are two types of agents in the financial market: speculators and fundamental investors. Speculators use past prices to predict future prices and only buy assets whose prices are expected to rise. Fundamental investors attach a certain value to each asset and buy when the asset is undervalued by the market. When the expectations of agents are exogenously driven, that is, entirely shaped by exogenous news, then they can be modeled as following a random walk. We assume that the information related to the two types of agents in the model will arrive randomly with a certain probability distribution and change the viewpoint of the agents according to a certain percentage. Our simulated results show that this model can simulate well the random walk of asset prices and explain the power‐law tail distribution of returns, volatility clustering, jumps, and structural changes of asset prices.

Price leadership in the South African foreign-exchange market: an empirical analysis

PurposeThe purpose of this paper is to investigate the information-based microstructure theory’s effectiveness in explaining short-term disturbances in currency prices by determining whether the price discovery process in the US dollar (USD) and South African rand (ZAR)-USD/ZAR spot market is led by an individual market agent, around an exogenous news event.Design/methodology/approachThe influence of central bank intervention-related events on USD/ZAR volatility is investigated through the application of Brown-Forsythe variance equality tests on individual dealer and market quotes. Furthermore, the study applies bivariate Granger-causality tests to individual dealers’ USD/ZAR spot rate quotes, in an effort to determine whether certain dealers can be established as price leaders around an exogenous news event.FindingsThe study finds significant evidence to suggest the USD/ZAR market price leadership of Nomura forex (FX) prior to the public announcement of a South African Reserve Bank intervention-related news event. This finding supports microstructure theory’s assertions regarding the existence of foreign-exchange market characteristics such as trader heterogeneity and private information.Research limitations/implicationsThe paper is conducted on a sample of eight USD/ZAR market agents, of which six are offshore dealers, and only two are located locally. Although these proportions are somewhat relatable to the locations of rand turnover, it would still be interesting to investigate the existence of price leadership solely amongst South African authorised FX dealers.Practical implicationsThe results suggest the existence and price relevance of private information, as well as the heterogeneous nature of USD/ZAR market participants, based on informational asymmetries. The outcomes of the paper are useful to market participants, researchers, and central banks alike.Originality/valueThough the study does not impugn the body of work related to the orthodox macroeconomic approaches to exchange rate determination, it seems apparent that much more microstructure-related research still has to be conducted in the context of emerging market currencies. It is this void that the current study has attempted to provide for in contribution to literature.

Strategic Real Options

Suppose a project manager is developing a product and wishes to sell it to a particular buyer who learns over time whether the product is profitable. I analyze situations like this with a real options model in which the seller of an asset has private information about its quality and can either wait (and incur a flow cost), exit the market, or upgrade the quality (at a hidden, lump-sum cost). The buyer learns about the asset’s quality from exogenous news and chooses when to exercise an option to buy it. For low upgrade costs, multiple equilibria exist and the seller may be endogenously motivated by failure or by success. When motivated by failure, the low-type seller waits until his reputation hits “rock bottom” and then upgrades with a large probability, inducing upward reputational jumps in equilibrium. The seller may then exit at intermediate reputations, inducing upward reputational skews. When motivated by success, the seller upgrades when his reputation is in a “sweet spot” region, also inducing upward reputational skews. Reputational jumps and skews manifest technically as resetting barriers and skew Brownian motion, generalizing the notion of a reflecting barrier.

Local Media and Individual Trading

Does local media affect how individual traders trade? The role of media on the stock market has only recently started receiving attention in the finance literature. This literature has mainly focused on single, nationwide press sources such as the Wall Street Journal and DJ Wire. As a consequence, the effect of local media on the markets has remained largely unexplored, in spite of the relatively large role of local media in informing households and the heterogeneity of local media across regions. This study investigates one facet of the relationship between local media and the markets: the incremental market influence of local media over other nationwide media. I find that local media predicts individual investors' trading patterns. In particular, I find that cities in which the local media mentions a particular stock see a substantial increase proportion of households that trade the stock over the subsequent periods. Using earnings announcement related news as a plausibly exogenous news shock, I also present evidence that this relation may be causal. Lastly, I present evidence that the local media effect may work through a salience channel.

Random Inspections and Periodic Reviews: Optimal Dynamic Monitoring

This paper studies the design of monitoring/audit policies in dynamic settings. Firm quality is private information and evolves stochastically via a Markov process with transitions depending on the firm's unobservable effort. The firm benefits from having a reputation for quality. A principal designs a monitoring policy that allows him to learn the firm's quality by conducting costly reviews. Monitoring plays two roles. First, it plays an incentive role, because when the principal discloses the outcome of inspections to the public, it affects the firm's reputation. Second, information is directly valuable when the principal's payoff is convex in reputation, for example because it allows consumers to make better choices. Our main result is a characterization of the optimal monitoring policy that induces full effort. The policy is surprisingly simple. It is either deterministic, whereby the date of the next inspection is pre-announced, or random, with a constant hazard rate of next inspection. We discuss how the type of optimal monitoring depends on history, the cost of monitoring, the persistence of quality, and the cost of effort. We also consider how the optimal monitoring policy is affected by the presence of exogenous news, showing how the evolution of the hazard of random monitoring depends on whether the absence of news is perceived to be good or bad news about quality.

Prediction and Characterization of High-Activity Events in Social Media Triggered by Real-World News.

On-line social networks publish information on a high volume of real-world events almost instantly, becoming a primary source for breaking news. Some of these real-world events can end up having a very strong impact on on-line social networks. The effect of such events can be analyzed from several perspectives, one of them being the intensity and characteristics of the collective activity that it produces in the social platform. We research 5,234 real-world news events encompassing 43 million messages discussed on the Twitter microblogging service for approximately 1 year. We show empirically that exogenous news events naturally create collective patterns of bursty behavior in combination with long periods of inactivity in the network. This type of behavior agrees with other patterns previously observed in other types of natural collective phenomena, as well as in individual human communications. In addition, we propose a methodology to classify news events according to the different levels of intensity in activity that they produce. In particular, we analyze the most highly active events and observe a consistent and strikingly different collective reaction from users when they are exposed to such events. This reaction is independent of an event’s reach and scope. We further observe that extremely high-activity events have characteristics that are quite distinguishable at the beginning stages of their outbreak. This allows us to predict with high precision, the top 8% of events that will have the most impact in the social network by just using the first 5% of the information of an event’s lifetime evolution. This strongly implies that high-activity events are naturally prioritized collectively by the social network, engaging users early on, way before they are brought to the mainstream audience.

The Transmission of Euro Area Sovereign Risk Contagion: Evidence from Intraday CDS and Bond Markets

We examine the role of the CDS and bond markets during and before the recent euro area sovereign debt crisis as transmission channels for credit risk contagion between sovereign entities. We analyse an intraday dataset for GIIPS countries as well as for France and Germany. Our findings suggest that, prior to the crisis, the CDS and bond markets were similarly important in the transmission of sovereign risk contagion, but that the importance of the bond market waned during the crisis. We find flight-to-safety effects during the crisis period in the German bond market. By using an exogenous macroeconomic news shock, we can show that, during the crisis period, sovereign credit risk was not related to economic fundamentals but rather driven by the announcements of the economic adjustment programmes (EAP) as the magnitude of risk contagion spreading from the country under the EAP did strongly decrease following these announcements. Only after the enlargement of the European Financial Stability Facility in July 2011, we find a strong decrease of interlinkages and a stabilising effect on the joint credit risk contagion across all GIIPS countries.

Optimal entry timing

A player of privately known strength chooses when to enter a market, and an incumbent chooses whether to compete or concede. Information about the potential entrant's type is revealed publicly according to an exogenous news process and the timing of entry. I analyze stationary equilibria using the public belief as a state variable. No equilibria in pure strategies exist, and smooth-pasting conditions need not hold. Under both D1 and a novel refinement, the informed player has nondecreasing value functions and her strategy has the following structure: for high states, both types enter with certainty; for a possibly empty interval of intermediate states, no type enters; and for low states, the high type enters while the low type mixes. I obtain closed form solutions and analyze comparative statics for such equilibria. The welfare effects of the presence of news, relative to no news, depend on the starting belief; however, for a fixed equilibrium, a marginal increase in news quality always helps the informed player regardless of her type and always hurts total welfare.

R&D Shocks and News Shocks

Most of the theoretical work in the news shock literature abstracts away from structural explanations, assuming instead that news is a pure signal giving agents advance notice that aggregate technology will undergo exogenous change at some future point. This paper proposes that a surprise improvement in sector‐specific productivity in the research and development sector can be seen as news about aggregate productivity. I not only offer a deeper explanation for the news but also show that the model performs modestly better in matching empirical facts than a standard, one‐sector neoclassical growth model augmented with exogenous news shocks does.

Optimal Entry Timing

A firm of privately known strength chooses when to enter a market, and an incumbent chooses whether to compete or concede. Information about the potential entrant's type is revealed publicly according to an exogenous news process and the timing of entry. I analyze stationary equilibria using the public belief as a state variable. No equilibria in pure strategies exist. Under both D1 and a novel re finement, all equilibria have the following structure: for high states, both types enter with certainty; for a possibly empty interval of intermediate states, no type enters; and for low states, the high type enters while the low type mixes. I obtain closed form solutions and analyze comparative statics for such equilibria.

Quantifying reflexivity in financial markets: Toward a prediction of flash crashes

We introduce a measure of activity of financial markets that provides a direct access to their level of endogeneity. This measure quantifies how much of price changes is due to endogenous feedback processes, as opposed to exogenous news. For this, we calibrate the self-excited conditional Poisson Hawkes model, which combines in a natural and parsimonious way exogenous influences with self-excited dynamics, to the E-mini S&P 500 futures contracts traded in the Chicago Mercantile Exchange from 1998 to 2010. We find that the level of endogeneity has increased significantly from 1998 to 2010, with only 70% in 1998 to less than 30% since 2007 of the price changes resulting from some revealed exogenous information. Analogous to nuclear plant safety measures concerned with avoiding "criticality," our measure provides a direct quantification of the distance of the financial market from a critical state defined precisely as the limit of diverging trading activity in the absence of any external driving.

Modeling Complicated Behavior of Stock Prices Using Discrete Self-Excited Multifractal Process

It is usually a challenge for finance and financial engineering to quantitatively describe the complicated behavior of stock prices because the behavior is caused by the adaptability and reflexivity of investors, driven by the endogenous interaction and perturbed by exogenous news. This paper models the behavior of stock prices basing on Self-excited multifractal(SEMF) process and deduces that probability distributions of the model are exponentially tempered Pareto distributions(CGMY model).The maximum likelihood estimator can be used to estimate parameters of CGMY and SEMF. The empirical results demonstrate that the SEMF process have a very good ability to quantitatively describe the complicated behavior of stock prices.

Quantifying Reflexivity in Financial Markets: Towards a Prediction of Flash Crashes

We introduce a new measure of activity of financial markets that provides a direct access to their level of endogeneity. This measure quantifies how much of price changes are due to endogenous feedback processes, as opposed to exogenous news. For this, we calibrate the self-excited conditional Poisson Hawkes model, which combines in a natural and parsimonious way exogenous influences with self-excited dynamics, to the E-mini S&P 500 futures contracts traded in the Chicago Mercantile Exchange from 1998 to 2010. We find that the level of endogeneity has increased significantly from 1998 to 2010, with only 70% in 1998 to less than 30% since 2007 of the price changes resulting from some revealed exogenous information. Analogous to nuclear plant safety concerned with avoiding “criticality”, our measure provides a direct quantification of the distance of the financial market to a critical state defined precisely as the limit of diverging trading activity in absence of any external driving.

Does informed trading occur in the options market? Some revealing clues

AbstractThis paper analyses the relationship between proxy variables for informed trading in the options market and a set of exogenous news variables. The aim was to test directly for the presence or absence of informed trading in the options market and for the possible impact of this trading on underlying asset prices. Our findings reveal that potential informed trading in options markets is channelled basically through out‐of‐the‐money options, except for volatility trading which mainly involves at‐the‐money options because of their liquidity. In both cases, we have found evidence in favour of investors’ strategic fragmentation of transactions into intermediate size trades (stealth trading). Finally, it is shown that lack of consensus among agents also generates increased trading, particularly in out‐of‐the‐money and at‐the‐money options.