Everyone has a reason to save a newspaper clipping at one time or another. Recently two developments have occurred that have allowed us to quantify how much, when, and in what direction financial markets move in response to news. Firstly, economic derivatives, auctions of derivatives on economic releases allow us to get a much better read on market sentiment than comes from surveys. In the last few posts I showed the statistics that show that the economic derivatives forecast outperforms the consensus for the nonfarm payrolls announcement. First, here is the chart of Actual (U.S. nonfarm payrolls or NFP) versus the economic derivatives or market-based forecast for the last 54 months (2002:01 – 2007:03).
However, the statistics of MAE, RMSE, correlation and especially the horse-race regression confirm that the economic derivative or auction market-based forecast outperforms the survey or Consensus forecast and that the latter adds nothing once you have the former. Refet S. Gürkaynak and Justin Wolfers compared the Consensus of Economists or survey-based forecasts with the economic derivatives or market-based forecast using data from Oct.
Again the economic derivatives or auction market-based forecast dominates the Economist survey or Consensus forecast. As with the smaller sample in GW, the MAE and RMSE are lower for the economic derivatives forecast. Fair-Shiller – Fair, Ray C. and Robert J. Shiller (1990), Comparing Information in Forecasts from Econometric Models,” American Economic Review, 80(3), 375-89. We have to get our news from a variety of sources to put the pieces of the puzzle together.
However this assumes that the variable you are interested in is in fact the economic release (such as the NFP). Economic Announcements and Risk Measures – This story investigates whether knowledge of an impending policy announcement by the Federal Reserve Board (Fed) is useful in estimating market volatility, and therefore risk. Good news does not lift the market as much as bad news depresses it. Also, bad news during a bear market has a bigger negative impact than bad news during a bull market.
Don’t forget thatI will be giving a presentation on the impact of news on financial markets to the Toronto Association for Business and Economics (TABE). Tom talks about how FX trading around economic announcements has changed over the last few years. He then outlines a view of the future of FX news trading that involves forecasting the announcement. As a result he says it is inevitable that he will have to make predictions of what the official numbers will be several hours prior to an important economic report. Economic announcements we have the results of derivatives auctions that give us a very good view of the market’s expectation.