1) INTRODUCTION
Daily news in media have high effects and very sensitive on stock prices. News of some macroeconomic variables such as interest rate, unemployment rate, inflation rate and GDP affects financial market participants.
Some examples:
(+) U.S stocks rise after surprisingly strong GDP rise ( Reuters, 28 February 2002)
(+) Stocks surge after central bank cuts interest rates in surprise move
(-) Weak reports on manufacturing and labor knocked stocks lower(CNN Money,1 August 2002)
(-) Stocks fall on unexpected decline in March jobless rate(Bloomberg,8 April 1999)
In efficient market hypothesis, stock prices are influenced by all true market news and reply simultaneously to this news. Market expectations are very important for stock prices movements. For example, announcement such as GDP growth or decreasing inflation rate don’t affect markets if announcements are the same as market expectations but surprise announcements can lead to highly stock price movements.
Standard Theoretical Model(Pictıre 1)
P: Stock Prices
d: expected future earnings/dividends
r: discount rate consisting of two components, the risk free rate and risk premium
That is, there are three primitive factors to affect stock prices. These are risk-free rate, growth expectations which are related to corporate dividends and earnings, and risk premium. For instance, lower than expected GDP can fall down stock prices because growth expectations are higher than real GDP. In contrast, lower than expected interest rate can lead to upward pressure on prices because of decrease of discount factor. The impact of news cannot explain if more than one of three factors occurs. There are three explanations for impact of news.
1) The effects depend on the type of news: News which directly conveys information has great important effect on stock prices. For instance, GDP announcements are very important for markets because announcements are highly related to growth expectations.
2) The impact of news depends on state of economy: Different states of economy can be expressed by news of conflicting information. For example, if unemployment rate increase, this can lead to downward pressure because this situation affect growth expectations. Also, higher than expected unemployment rate in expansion period affects markets.
3) Just like domestic news, foreign news is expected to have an impact on stock price: World economies are integrated and globalized. Macroeconomics announcements in a country may have great effects on other countries which are especially neighbor and have high trade and capital volume.
2) MEASURING MACROECONOMIC NEWS
2.1) Surprise Announcements
Financial news has more different impact than normal news. Normal news measure report of recent news or unknown information but financial news is more related with unknown information and finance managers endeavor to anticipate this news. Financial news is hard to anticipate because this news contains very surprised situations or investors experience unexpected events if they expect their scenario. For example, investors in Turkey expect to increase interest rate but they are surprised if Central Bank of the Republic of Turkey decreases interest rate.
2.2) Business Cycle on Economy
Boom period, normal period and recession period are business cycle for economies. News impact can be separately divided these periods. There are asymmetric effects from period to period. For example, unemployment rate, central bank target, and GDP growth rate are variable effects in different periods.
According to Funke and Matsuda, “good (bad) economic news is good(bad) news for stock prices in recession period. When economy is very weak, higher than expected GDP growth rates lead to positive stock market reaction. In contrast, good economic news is bad news for stock prices. If economy is in boom period, higher than expected GDP growth rates dampen stock prices”. For example, higher GDP in boom period can lead to overheat economy so interest rates may increase.
Moreover, investors normally avoids higher interest rate because high interest rates fall down value of expected earnings but they think that this can be good news in recession period as monetary authorities can increase due to grow expectations in the future.
2.3) International Events
Stock market events are not only influenced by domestic news but also by international news. A new that occurs after close or opening of a country stock exchange may have great impact in other countries because countries can have positively correlations together.
Picture 2
Table indicates relationships of important stock exchanges. Generally, investors should take into account these variables. For example, a German investor should closely follow France because FTSE and CAC are positively correlated.
Moreover, countries which are neighbor and have high trade and capital volume are affected by important news and situations. For current examples, Ireland and Greece debt crisis had great impact in relevant countries stock exchange.
2.4) Increasing Credit-Ratings
News of credit ratings institutions such as Moody’s and S&P seems to have great impact in stock exchange but economical states of countries have more efficient even if credit grades increase. For example, credit grades of Mexico became from non-investment to investment-grade by Moody’s in 2000 but Mexico was in recession period and Mexican Stock Exchange continued to decrease. However, stock exchanges can raise parallel with going up credit grades. For example, Moody’s increased credit grades of India and Bombay Stock Exchange which had upward trend in commodity markets boosted 5.2 % in a day and 10.4 % in three months. That is, increasing credit ratings depended on economical states of countries.
3) GOOD OR BAD NEWS
According to Parker, “two types of news need to be defined: good and bad news. Good news usually upward movement and bad news is defined as downward market movements”.
News impact results by asymmetric market response. That is, good news can be insignificant while bad news can shock markets so impact is not symmetric. Also, state of stock markets can be divided into bearish and bullish markets. Bearish markets are more sensitive than bullish markets to news. Shortly brief, types of news influence volatility differently in each business cycle.
4) CURRENT CASES IN TURKEY
4.1) Sovereign Debt Crisis of Ireland (November, 2010)
Ireland experience debt crisis before short times. Many negative rumors were spread by news channels such as Bloomberg and Reuters. Globally, investors worried about euro zone and Euro depreciated against Dollar and stock markets was affected owing to worries. And herding behaviors had great impact in drop. For example, XU100 in ISE fell down 3.5 % in a day.
4.2) Statement of the Chairperson of BRSA (December, 2010)
Tevfik Bilgin, Chairperson of BRSA, made a statement regarding dividend payout of banks in December, 2010. He says that “banks will not distribute their dividends in 2011”. This news resulted in selling stocks by domestic and international investors because they expected dividend earnings. Following table summarizes weekly big changes in banking stocks.
Stocks /Total Foreign Share /Weekly Change
Akbank /55% /(-)3.85%
Garanti Bank /79% /(-)8.11%
Is Bank C /70% /(-)6.67%
Vakıf Bank /79% /(-)5.28%
4.3) Banvit (January, 2011)
Banvit, Turkey’s leading meat producer, notified to halt meat production due to price of red meat in January 10, 2011. This news by Public Disclosure Platform depreciated significantly Banvit stocks because red meat has big share in profitability of Banvit Weekly change was (-) 9.92 %.
5) MANAGING RISK OF NEWS IMPACT
Firstly, risk managers should have awareness both domestic and international news and analyze potential impact of current news.
Volatility is unobserved but risk managers can manage and forecast risk with volatility models by applying scenarios. Risk management practices should take into account the drawbacks of these models including GARCH, TARCH and EGARCH.
5.1) GARCH (Generalized Autoregressive Conditional Heteroscedasticity)
Autoregressive term refers that volatility for every periods is obtained by volatilities of previous periods. And Conditional Heteroscedasticity states changes of variance.
Volatility is basic concept of risk management. Financial institutions have future forecast and expectations. Risk management wants to seek determining deviations from expected values. GARCH is forecast model about deviations of expected value.
GARCH Model;
However, GARCH model is not enough to measure asymmetric impact of news. According to Parker, risk managers should measure volatility with two popular asymmetric GARCH models. These are Threshold GARCH (TARCH) and exponential GARCH (EGARCH).
5.2) TARCH
TARCH includes that “negative news has bigger impact on volatility than positive news” according to Zakoian, Jaganathan, Glosten, and Runkle.
TARCH Model
5.3) EGARCH
“EGARCH model eliminates non-negativity constraints of GARCH models by formulating conditional variance in logarithmic terms” according to Nelson. Like TARCH, EGARCH model also states that negative news is more volatile than positive news.
Following graph compares three models. As is seen, GARCH model is symmetric, while TARCH and EGARCH models are asymmetric.
Halil Yasin Keklik
REFERENCES
1) Parker, John C. “How Bad is Bad News; How Good is Good News”?
2) Funke, N. and Matsuda, A. “Macroeconomic News and Stock Returns in the United States ad Germany”
3) Fortune Turkey, January 2011.
4) Para Magazine. December 19-25, 2010.
5) Bolgün, K. E. “Risk Yönetimi”
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