Good And Bad News On Stock Market
Choose one or few companies and use data analysis to explore the impact of good news and bad news on their stock market.
Applied Finance Project Titles (2018/19)
The titles and details of the Applied Finance Projects are listed below. Each topic has a title, a short description of the topic, some suggestions of data and data sources you might use if the data are not provided, suggestions how you might conduct the research and a short list of some key readings. This is meant to provide an introduction to the topic only and you may want to go beyond these core readings. You can identify additional readings using, for example, the Library’s on-line search facilities or the Google. You may decide, in consultation with your project supervisor, to focus the research in a particular direction and/or exploit a different source of data than that suggested below.
In the topic list there are often several topics which are related (e.g. doing the same project but for different data sets which may be different countries). It might be useful to cross- reference to the related topics as there may be useful suggestions on methods, data and readings in broadly similar topics.
7. What is the effect of good and bad “news” on stock market prices?
Outline: The recent BP oil spill in the Gulf of Mexico is by far the largest oil spill in the history of the oil industry. Aside from the environmental and economic impacts on people in and around the Gulf of Mexico, what effect did it have on share prices of BP, and other large oil companies? We might expect that the share price was affected by the release of news about the severity of the spill and clean up costs (i.e. new information) and also by public anti-BP statements by Obama and others. Were other oil companies affected, and by how much compared to BP?
The effect of good and bad news on share prices is a particular area of study for economists interested in the efficient market hypothesis. How did the SARS outbreak in China in April 2003 affect the Hang Seng? How did the fake powdered milk case in Fuyang in 2004 affect stock market confidence in China and more specifically shares in food processing or food producing companies? What about the ill health and eventual death of Steve Jobs – how was the Apple share price affected? You could investigate the effect of news of a merger, or collapse of a deal, discovery of a new resource, outbreak of war or peace etc, election of a new party to government etc. Rather than follow an individual firm’s share price, you could examine an overall share price index and examine the effect of “news” on its value.
This topic can potentially be chosen by several students, as long as each student chooses their own firm and news event (or events).
Methodology: A very simple approach would be to regress the daily share price on say, the market interest rate, and one or more dummy variables that capture “news” events. You
will find that the literature on stock market efficiency has more sophisticated models. Start with something simple and then build on that.
Data: Share price data are easily accessible on-line and if you have relevant cases you can choose the Chinese stock market. You need to decide if you want daily prices or something averaged over a period, or measures of volatility that you will construct form the raw price data. You need to make sure you cover a sufficiently long period before and after the “events”. You might also want to access share price data on either the relevant industry as a whole, or of main rivals, to test if the share price you are following moved in line with other firms. You will need to construct 'news' events that might have affected the share price – good and bad news. This may require piecing together lots of info from media coverage. You may find it useful to construct a time-line of events (speeches, press releases, real events) and see if any of those are followed by drops or rallies in the share price. Of course, some news may have been good.
Readings:
Richard J. Cebula, James V. Koch and Robert N. Fenili, (2011) “Do Investors Care if Steve Jobs is Healthy?” Atlantic Economic Journal Special Issue: Current Issues in Financial Economics" vol 39 Issue:1, pp59-70.
L S Copeland (1989), Market efficiency before and after the crash, Fiscal Studies vol 10(3), 13-33
M Firth (1986), The efficient markets theory, in M Firth and S M Keane (eds), Issues in Finance, Philip Allan
P D Jackson and A D O'Donnell (1985), The effects of stamp duty on equity transactions and prices in the UK Stock Exchange, Bank of England Discussion Paper 25
R H Thaler (1987), Anomalies, Journal of Economic Perspectives, vol 1(1), 197-201, and vol 1(2), 169-178
On oil spills (pre-BP Gulf of Mexico):
Ronald J. Alsop (2004) “Corporate reputation: Anything but superficial – the deep but fragile
nature of corporate reputation” Journal of Business Strategy, Vol. 25 Iss: 6, pp.21 – 29
Kasim Alli, Samantha Thapa and Kenneth Yung ((1994), “Stock Price Dynamics In Overlapped Market Segments: Intra And Inter-Industry Contagion Effects”. Journal of Business Finance & Accounting, 21: 1059–1070
Herbst, Anthony, John Marshall and John Wingender (1996) “An Analysis of the stock market response to the Exxon-Valdez disaster” Global Finance Journal 7(1): 101-114 – available freely on-line
What Is the Effect of Good and Bad “News” On Stock Market Prices?
Name
Institution
Course
Due Date
What Is the Effect of Good and Bad “News” On Stock Market Prices?
Introduction
The evolution of technology within the last two decades has had an impact on both the media and the stock market since they are capable of operating in real time. The technological innovations have led to an increase in the level of trading activities which also includes the increase in the number of investors that enter the stock market. At the same time, the expansion of the media especially in the use of the internet is capable of providing the public with efficient, timely and voluminous information through different digital platforms. There are few studies that have investigated the correlation and impact of media platform on the stock prices. The stock market has been considered as one of the fast-paced sectors of the economy, therefore, fascinating investors through the centuries (The Emerging Future, 2012).
The evolvement of technology has made the sector to grow substantially at an exponential rate, therefore, making the market to open up to the public facilitating the speedy processing of transactions (The Emerging Future, 2012). The improvement in technology ensures that stock markets run fully on real time since there are appropriate tools such as software that makes the sector attractive to both big investors who potentially affects the market index and the small private investors who invest in the same stock market. The study by Yilmaz et al., (2015) shows that the conversion of the stock market into a real-time job with a variation of stock price taking place almost every time. This has led to an increase in the activities within the stock market all over the world. The author also reveals the fact that the implementation of a sophisticated platform as a stock exchange tool influences the overall liquidity within the market. According to Brogaard et al., (2013), besides the technological advancement helping in the improvement of the trading activities within the stock market, the high-frequency traders (HFTs) has been granted the benefit of accessing the markets including facilitation of price activities.
Taiwan’s Stock Market Reaction to Political Leadership News
The top leadership power struggles in Taiwan between the years 2005 until 2014 have resulted into either “good” or “Bad” news, which have ultimately affected the Stock Market. There are significant differences in the reactions from the stock market even in the cases where the exchange rate fluctuated or were adjusted in accordance to performance across equity markets. In the emerging markets apart from the known asset pricing factors such as interest rate risk or credit risk, the political risk is less addressed by the literature. However, the political risk is considered as more influential to towards asset values within the emerging economies such as Taiwan. The focus in this case focuses on effects of news on leadership-shifting political events on the Taiwan’s financial market considered as part of the Greater China Region. Amongst the countries within the Greater China Region Taiwan is believed to have higher political freedom as compared to others. This makes it interesting to examine the response of Taiwanese stock market to political events associated with good news or bad news for top leadership. The political events within this region affected both the value of the currency as well as the emerging market’s equity prices.
The Political Business Cycle (PBC) theorem points to the fact that, the process associated with the administration of a party involves the incumbent government officials being under obligation and having incentives required for pursuance of economic policies. This is applicable for the purposes of improving on voter support especially in an election year (Block and Vaaler, 2004). The PBC in most instances influences investment strategies as well as pricing of asset in the market (Julio and Yook, 2012). The empirical evidence of PBC valuation in a non-industrialized country that has democratic system is a common experience as opposed to industrialized countries that usually present mixed results (Block and Vaaler, 2004). The instances of political unrest as experienced in certain regimes usually have side-effects on economic growth as well as social development which results in significant changes on stock market returns (Chau et al., 2014).
Taiwan is directly involved in trading with the Mainland China, Taiwan’s trade deficits are evidently covered by the country’s cross-trade surplus with the Mainland. In this case, the KMT “the blues” party is according to the public the business-oriented as compared to the DPP “the greens” party. However, this study examines the effects of selective news on a major event on the political risk valuation that involves changes in top leadership. The first news event could be dubbed “good news” whereby on March 22, 2008, the chairman of the KMT party won the presidential election where he garnered 58 % of the popular vote against the opponent from the DPP party. In the subsequent election that took place in 2012, the Candidate for KMT party won by landslide, therefore, was re-elected. On the second event considered “bad news” occurred on December 3, 2014, where the KMT party leader resigned from his position of being the chairman for the purposes of taking the blame on the failure to control significant powerbase in Taiwan. Making the president to be despised and referred to as “lame-duck” by the people. This event shifted victory to DPP party in the 2014 election, where they won most of the municipalities and well as counties as compared to KMT.
Data and Methodology
This study has obtained its data from the daily time series of stock market indices downloaded from Yahoo! Finance section on historical prices. It is referred to as Taiwan Stock Exchamge’s TSE composite index (http://finance.yahoo.com/q/hp?s=˄TWII + Historical + Prices. For the purposes of controlling the possible effects of fluctuations in exchange rate across the sample especially on corresponding stock index returns, there was inclusion of the daily time series on currency rates for the New Taiwan Dollar from the online database on Economic Research. In the computation formula, the asset return (index or currency) for certain day t is computed as the difference in natural logarithms of the asset prices occurring between days t and t-1. The sampling covers a ten year period from 2005 to December 2014. The Table 1 below is a summary of the descriptive statistics on the daily returns.
Table 1: Descriptive Statistics on Daily Asset Returns
Assets
Mean
Std. Dev.
Min.
Max.
Kurtosis
Skewness
J-B
S&P 500 Index
0.0293%
1.2867%
-9.0350%
11.5800%
11.3032
-0.0812
7,492
TSE Comp. Index
0.0248%
1.2417%
-6.5133%
6.7422%
3.4961
-0.2993
66
NT Dollar/US$
0.0003%
0.3022%
-3.3651%
2.5159%
13.0136
-0.5848
11,041
In this study, the reaction of the stock market to specific news event is tested for significance by use of the abnormal mean return as well as the shifts in return volatility. Multivariate Regression Model is applicable in the computation of the abnormal mean return. Such model is usually built upon system portfolio return equations that follow news coverage on events and the systematic as well as political-event risk factored into the pricing mechanism.
Rj,t = Φj + μj Rm,t + φGjGOODNEWSj,t + φBjBADNEWSj,t + εj,t……………….(i)
Rj,t – the return on the Taiwan market index j on day t
Φj- this represents the intercept coefficient for Taiwan index j
Rm,t – this denotes the return on the US S&P 500 index as benchmark for comparing performance in the global market on day t
μj – this is the coefficient of sensitivity towards the United States market for Taiwan index j
GOODNEWSj,t and BADNEWSj,t - this represents the dummy variable that equals 1 during the [-1, +1] window period associated with the announcement of news and equals 0 otherwise
φGj and φBj - this is the price return reaction on the corresponding Taiwan index j;
εj,t – represents an independent as well as an identically-distributed normal error term
The Seemingly Unrelated Regression (SUR) methodology is applicable in the case of a series of daily returns that spreads over days of trading during the occurrence of the political event. The following hypothesis were formulated and tested:
H1: φGj = 0 across j . the abnormal return for Taiwan market index equals zero in the event that there is “good news” on leadership
H2: φBj = 0 across j. the abnormal return for Taiwan market index equals zero in the event that there is “bad news” on leadership
In the case where fluctuations in exchange rates are accounted for and in the checking for outcome robustness, the model for the pricing mechanism should be as follows:
Rjt = Φj + μj Rmt + λj EXjt + φGjGOODNEWSjt + φBjBADNEWSjt + εjt,…….(ii)
In this case EXjt represents the daily percentage changes experienced in the exchange rate between the US dollar and the NT currency. The second equation is used to test hypothesis 1 and 2 for the purposes of controlling the international systematic risk and the risk associated with exchange rate. This ultimately helps in the computation of political risk associated with news which is a crucial factor for investors.
The other methodology applicable is the use of Generalized Autoregressive Conditional Heteroscedasticity framework (GARCH) that helps to examine the effects of political news event towards the volatility changes especially in the corresponding Taiwan stock returns.
Results of the Analysis
The Table 2 below shows a report of the key results from the MVRM as per the equations i and ii above. Particularly, the cumulative results on the abnormal returns over a period of three days depending on the coverage of either “good” or “bad” news. The second column Panel A shows the estimates of the SUR on a cumulative basis of abnormal returns before the control on the movements of the corresponding rates and the third column with Panel B shows already adjusted estimates for risk associated with the exchange rate.
Table 2: Key MVRM Results
Election Event
Panel A: Equation (1),
Taiwan Market 3-Day Abnormal Return before Adjusting for Exchange Rate Risk
Panel B: Equation (2),
Taiwan Market 3-Day Abnormal Return after Adjusting for Exchange Rate Risk
φ for [-1, +1]
t-value
p-value
φ for [-1, +1]
t-value
p-value
Taiwan Event 1, Mar-22-2008,
“GoodNews”
1.4375%***
4.7447
0.0016
2.0183%***
5.2259
0.0003
Taiwan Event 2,
Dec-03-2014,
“Bad News”
2.1302%**
2.1590
0.0462
1.8699%**
2.0121
0.0493
NB: *, ** and *** denotes statistical significance at the 0.10, 0.05 and 0.01 levels, respectively
Table 2 shows that there was gain in the Taiwan’s TSE stock index with an excess return of 1.4375% over a period of 3 days amidst the announcement of “good news” concerning the top leadership through the media. There was positive reaction from the stock market the moment KMT party won the presidential seat. This was after the country had suffered for a period of 8 years under the DPP regime. Further, taking into account the relations between NT$ and the US $ and the associated exchange risk, there was still persistent gain from the TSE index (2.8183%). However, years later when the same party KMT suffered defeat “bad news”, there was positive reaction from investors in Taiwan stock market, with the TSE index recording gain (2.1302%) within 3 days (significant at 0.05) in the wake of accounting for currency risk.
In line with the MVRM results it is evident that the Taiwan stock market both “good news” and “bad news” positively relates to stock returns. In this case, even in the wake of “bad news” there is a possibility of a positive response from the market price retur...