From The Vault: Separating News And Noise … And Jokes

by Anna Snider – Liberty Street Economics, Federal Reserve Bank of San Francisco

Tesla Motors’ shares saw a brief bounce from a far-out and fictional product (a smart watch) announced as part of an April fool’s prank. While markets evidently made quick sense of the joke, that’s not always the case.

A trio of Liberty Street Economics bloggers found it can take days for investors to distinguish noise from news that’s relevant to an asset’s fundamental value.

In their piece, Carlos Carvalho, Nicholas Klagge, and Emanuel Moench document a persistent drag on United Airlines’ stock after a six-year-old article about the parent company’s 2002 bankruptcy resurfaced on the Internet and was mistakenly believed to be reporting a fresh bankruptcy filing. Shares fell as much as 76 percent in a few minutes, and took seven trading days to fully rebound.

…[E]ven when noise can be clearly identified, markets may take as long as a week to fully process the ‘signal,’ or relevant information, component of news,” the bloggers wrote, underscoring inefficiencies in how markets process information.

For the story, check out How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Source: http://libertystreeteconomics.newyorkfed.org/2015/04/from-the-vault-separating-news-and-noise-and-jokes.html#.VSkiufnF9K4

About the Author

Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.