MSc in Finance and International Business

Author: Eli Dulwich

Academic Advisor: Jan Bartholdy

The impact news has upon stock price volatility

An investigation into the impact major BBC news reports
have upon the FTSE 100.

Aarhus School of Business

December / 2006
 TABLE OF CONTENTS

INTRODUCTION ..................................................................................................................................2
CHAPTER 1 - NEWS AND INFORMATION ....................................................................................4
CHAPTER 2 - HOW ARE MANAGERS INFLUENCED BY NEWS REPORTS? ......................10
CHAPTER 3 - INVESTOR PERCEPTIONS ....................................................................................23
CHAPTER 4 - INFORMATION VALUES STOCK PRICES .........................................................41
CHAPTER 5 - METHODOLOGY .....................................................................................................48
DATA HANDLING................................................................................................................................50
News selection process .................................................................................................................50
FTSE 100 Price Index...................................................................................................................50
Observation Blocks one and two...................................................................................................51
Extreme Events of Volatility..........................................................................................................51
CHAPTER 6 - EMPIRICAL ANALYSIS..........................................................................................53
EXTREME VOLATILITY EVENTS ..........................................................................................................53
MAJOR NEWS EVENTS ........................................................................................................................56
CHAPTER 7 – SHORTCOMINGS AND SUGGESTIONS FOR FUTURE RESEARCH ...........61
BIBLIOGRAPHY ................................................................................................................................66
APPENDIX ...........................................................................................................................................79

1
INTRODUCTION

It is clear that the effect news reports have upon stock returns is yet to be understood
in any depth and most famously has been researched by Fama (1991). This paper has
the desire to gain a better understanding of how news impacts stock price volatility
and returns within the real economy.

Beginning in chapter one with the discussion of the modern day situation journalists
and news providers are in with a global audience and sophisticated communication
channels. This leads to the topic of what influences the way managers disclose
information to investors. Followed by the way investors perceive these disclosures in
chapter three. In chapter four we look more closely at the impact information has on
stock prices. Chapter five covers previous researchers and the methods used relevant
to the methodology criteria chosen within the research of this paper.

The most effective method of measuring the effects of news reports upon stock price
volatility is through the use of event studies. MacKinley (1997) clearly describes the
usefulness of this type of study and its ability to capture findings in short periods of
time. Researchers such as Haugen, Talmor and Torous (1991); Dolde, Saad and
Tirtiroglu (2002); Antweiler and Frank (2006) were particularly influential to the
methods chosen to discover the impact major BBC news reports have upon the stock
price volatility of the FTSE 100.

Within the methodology a description of how BBC news reports that reached the
BBC history archive were selected. In total there were 198 news reports 1 classified as
major between June 11, 1987 and November 25, 1999. These can be found on the
BBC “on this day” website 2. The FTSE 100 Index Prices seemed most appropriate as
the BBC’s headquarters are based in London. As the time frame between news
reports is inconsistent, it was necessary to remove news reports that overlapped others
and in total 73 news reports contributed to the findings of this paper.

1 Appendix: Table 14 – Headlines of all 198 Major BBC News Reports

2 http://news.bbc.co.uk/onthisday/hi/years/default.stm

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In Chapter six the findings are presented showing the changes in volatility and return
with the FTSE 100 after each BBC News Report. These findings are somewhat
similar to the findings of Haugen, Talmor and Torous (1991). They found that 13.7%
of all volatility increases and 9.1% of all volatile decreases were linked with
extraordinary news reports. Alternatively when matching news reports to extreme
volatility events Dolde, Saad and Tirtiroglu (2002) found that 63.5% of extreme
volatility increases and 53.4% of volatility decreases are associated with extraordinary
news reports.

It is apparent that there is a great deal yet to be understood concerning the way
investors perceive news reports. Further research will continue to enhance an
understanding of the reliability of forecasts given by managers and analysts.

3
CHAPTER 1 - NEWS AND INFORMATION

Journalists and news reporters have never had as large an audience as they do now.
Information can be send all over the world in a matter of seconds reaching a new
higher dissemination of knowledge. News reports relating to firms are available for
investors at every hour of the day. However although there is a vast amount of news
and information available the quality of information may be questionable. Jensen
(1977) wrote about how there is a low standard of reports written in newspapers due
to a lack of analysis and economic knowledge held by journalists. He goes on to
explain how newspapers and the majority of media aim to provide entertainment that
sells and that the best reporters are paid far less than professions such as law,
medicine, investments and academics.

It is clear that the effect news reports have upon stock returns is yet to be understood
in any depth and most famously has been researched by Fama (1991) who wrote that
there was a desire to gain a comprehensive understanding of how expected returns
operate in the real economy and how expected returns vary over time. Until this
desire is fulfilled, investors will assure themselves that there is no plausible
explanation. Attempts by researchers throughout the 1980’s failed to find
explanations for variations in extreme stock return volatility and asset-price
movements 3. This led researchers to examine the connection between extraordinary
news reports and events of extreme volatility. Haugen, Talmor and Torous (1991)
identified that within the Dow Jones (1897 – 1988) there was a 13.7% link with
extreme increases and 9.1% link with decreases, which suggested that there was little
connection between news and extraordinary news. However the findings of Dolde,
Dogan and Tirtiroglu (2002) were believed to be different because of the increase in
sophistication both economically and financially as well as communication methods
also becoming cheaper and instantaneous. Rising volatility occurred prior to
downward changes in stock prices, which can be explained by investors increasing
their necessary returns due to increases in risk taken. However when volatility levels
fell there was an identifiable reaction in price which may be a result of less media
coverage and news reports concerning smaller stocks. These findings signal that as

3 Namely Schwert (1989), Roll (1988) and Cutler, Poterba and Summers (1989)

4
the level of sophistication increases in communication sensitivity in financial markets
to news reports are on the increases.

Adams, McQueen and Wood (1999) found significant results that contradicted
numerous previous researchers. With regards to inflation news there was a strong
sign of impact upon stock prices from Producer Price Index (PPI) news and a slight
impact from Consumer Price Index (CPI) news. They also found that there was lack
of explanation for certain strong responses to CPI news with strong and stable stock.
Factors such as a lack of volume, wide bid-ask spreads and delayed reactions could
not be identified as causes. However there was awareness that when pricing stocks,
Consumer Price Index news was disclosed less frequently and was less relevant for
noisy stock returns compared to Producer Price Index news. This could easily be a
result of the way in which inflation news is released at a scheduled moment in time
that was made known months in advance. Financial newspapers remind readers
shortly before announcements are to be made creating a great deal of awareness.
Then an hour before markets open the announcement is made about any changes in
inflation. Thus permits investors to change strategies and orders before the market re-
opens in New York. Madhavan and Panchapagesan (1998) proved that over 17% of
daily trades take place in the first half an hour. Two years prior to this Gosnell,
Keown and Pinkerton (1996) and Greene and Watts (1996) discovered that stock
prices react within the hour after a firm discloses specific information. Adams,
McQueen and Wood (1999) found that large and medium sized stocks were inclined
to react to PPI news within approximately 15 minutes. This is largely as a result of a
lack of training in the first few minutes of the trading day. Although it should be
noted that the slow response can be due to large companies trading with a range of
non-equilibrium prices that eventually neutralise to a single price that considers all
relevant news. However this was not proven to be true for small sized stocks.

Another common form of news that relates to stock prices is political news. Amihud
and Wohl (2003) looked at the impact upon U.S stock prices during the events leading
to the second Gulf War. On March 20th 2003 the United States launched an attack on
an area where Saddam Hussein was believed to be. However months prior to this
President Bush had announced his objective of changing Iraq’s government and due
to political obstacles and logistics it took time for the attack to be prepared. During

5
this period of time the world anticipated a war to break out and the U.S dollar became
weakened against the Euro due to expectations of the U.S economy being weakened
because of a potentially expensive war. Stock prices were lowered and adjusted
gradually to political news reports. During the war expectations rose to Saddam’s fall
and caused the U.S dollar to strengthen against the Euro and oil prices lowered.
Investors interpreted the news about the war in differently during the war compared to
before the war began. During the pre-war period an increase in expectation of
Suddam’s fall meant that the likelihood of war was greater and therefore would cost
the U.S economy. However during the war an expectation of Suddam’s fall gave
investors the expectation that the war would end soon and therefore would be less
costly for the U.S economy, causing oil prices to lower and a sense of greater security
within the United States of America. Amihud and Wohl (2003) found that stock
prices gradually took political news reports into consideration and adjusted
accordingly. It was also noted that the amount of attention the media gave to a certain
issue impacted the level to which stock prices were affected. Bailey, Warren and
Chung (1995) discovered that increased political risk in Mexico affected asset prices
negatively as equity market premiums rose in order to compensate for the exposure to
added risk and consequently lowered equity prices.

We have now discussed the implications news can have upon stock prices, although
not all information is reliable and speculation has proven to cause even more drastic
volatile jumps in stock prices. One prime example relates to EntreMed (ENMD) who
experienced excessive increases in their stock prices due to investors believing that
they had developed a new drug that could cure cancer. Huberman and Regev (1999)
investigated this case in closer detail in order to attempt to identify the causes of such
volatility. They noticed that not only did the volume in trades of Entremed increase
by over 400 times the normal volume but other biotechnology stocks also experienced
increases in stock prices.

On May 3rd 1998 the New York Times 4 reported that there had been a breakthrough
in the research of cancer and that EntreMed held the licensing rights of the
breakthrough. This report created an enormous impact that proved to be lasting even

4 Kolata’s (1998)

6
though there was no new information disclosed. The article was positioned in the top
left corner of the page with a label starting “A special report”. A range of experts
were quoted with presumptuous statements. EntreMed’s stock rose in price from
12.06 to 33.25 one week later. This was a mystifying occurrence due to the fact that
no new information had been released. Half a year earlier the Times, Nature and
other publications had initially written about the scientific breakthrough and found
that EntreMed gained a 28% return due to the speculation. However between the
closing price on May 4th 1998 and the closing price on May 7th 1998, EntreMed had
an incredible return of 330%.

Although the short-term impact of the publications was extreme, the long-term impact
was also evident. Half a year after the May 4th 1998 stock price rise EntreMed was
still trading around the 30 mark, regardless of the fact that the stock market had
experienced a fall in value, and at no moment in time had traded below 16.94. This
meant that since the publication on May 3rd 1998 the stock price had never gone
below the price that EntreMed held on May 1st. Then on November 12th 1998 the
Wall Street Journal 5 wrote that there had been a failure in the attempt of replicating
the breakthrough that had been speculated upon on May 3rd. This caused stock in
EntreMed to fall from 32.625 to 24.875 (24%) in a single day. However this was still
over double the price EntreMed held on May 1st 1998.

The real mystery was the fact that the reaction to the no new news report in May 1998
created much more volatility in EntreMed’s stock price than the initial report in
November 1997. This highlights the difficulty in predicting the behaviour of
investors and the nature of reactions to various forms of information. Huberman and
Regev (1999) discuss this issue in some length and write that one explanation could
be taken from Black (1986) who wrote how traders that use noise as if it was true
information create the illusion that it is beneficial to trade even though from an
objective viewpoint it would be better to seize from trading.

These findings appear to insinuate that editors of publications that are read by a large
audience have the power to affect stock prices of related industries and especially

5 King (1998)

7
specific companies. However Abelason (1998) recognised that the article contained
nothing new and that professional investors had been aware of the research progress
of cancer therapy which was also reflected in the share price prior to the publication.
Huberman and Regev (1999) describe the event as embarrassing to the classical
finance paradigm as the popular media had the power to influence a stock price so
strongly on a permanent basis.

However Kothari, Shu and Wysocki (2005) explain that the type of news or
information being released causes different types of behaviour. This implies that the
way in which news is released and the type of news influences the actions of investors
in different ways. If the typical behaviour of a manager is to conceal bad news until it
adds up to a certain level, but instantly divulge good news to investors. There will be
a more dramatic reaction by investors whenever bad news is released compared to
good news. Skinner (1994, 1997) and Kasznik and Lev (1995) found this to be true
when analysing stock price volatility in relation to good and bad news. They found
that even with the incentive of alleviating litigation risk, managers on average delayed
the release of bad news to investors. Kothari, Shu and Wysocki (2005) mention that
although private information exists, so does the opportunity for managers to reveal
information at their own will. Thereby holding the power to influence the company’s
stock price as information asymmetry is abridged between management and outside
investors. One of the earliest researchers of reactions after earning announcements
was Ball and Brown (1968). They found that the returns of positive information
companies continued to experience a drift upwards while companies that gave
negative information experienced a downwards drift. Fama (1998) wrote how this
was one of the most profound anomalies in the stock market. Healy and Palepu
(2001) and Verrecchia (2001) both researched the reasons as to why managers decide
to release or conceal private information that they hold. One major finding was that
by quickly releasing both good and bad information that was previously private, a
domino effect resulted in information asymmetry being minimised which in turn
resulted in the “adverse-selection component of the bid-ask spread also being reduced.
This theoretically increases the company’s market value as the company’s cost of
capital is reduced. Managers may choose to release either good or bad news as a
means of raising the value of their own option grants or stock held. An in depth

8
research paper concerning this issue was written by Lang and Lundholm (2000), who
found that managers disclosed positive news before raising external funds.

The element of surprise is an experience that investors associate with delight

according to Plutchik (1980). Vanhamme (2003) continued this area of research by
analysing an interesting connection between the way customers typically showed
emotions of delight when being surprised, this lead to higher levels of customer
satisfaction. Findings from Vanhamme’s research suggest that customers that are
surprised experience higher levels of satisfaction and dissatisfaction than customers
that are not surprised. These finding were applied specifically to customer transaction
satisfaction and not in relation to investors in the stock market. It does discuss the
impact businesses can have upon their customers through surprise as a marketing tool.
However there can also be negative consequences if regular surprises occur to
customers giving them a new expectation. This in many ways applies to the way in
which corporations disclose their forecasts for the following quarter and the way in
which investors expect analyst’s forecasts to be met. If corporations can take away
the surprise effect from lower profits by following the recommendations from Jensen
(2002) the volatility shock may be less dramatic. However according to Vanhamme
(2003) if forecasts are consistently beaten, investors will adjust their expectations and
no longer be surprised by the corporation’s performance. Therefore although an
initial surprise will increase or decrease customer satisfaction it appears more
appropriate for corporations to disclose information into the market early. The
following chapter will look more closely at the behaviour of managers concerning
news announcements and the impact they have on the firm’s stock price.

9
CHAPTER 2 - HOW ARE MANAGERS INFLUENCED BY
NEWS REPORTS?

The way in which news is disclosed by management depends heavily upon whether a
conflict of interests exists between the stockholders and management. Yermack
(1997), Aboody and Kasznik (2000) write about how the hasty release of negative
news or concealment of positive news prior to option grant dates can lower the
exercise price of the option. Consequently benefiting the manager as the value of
their option grant portfolio increases and rewards the manager for strategically
releasing and withholding news. Although it should be noted that there are also
strategic advantages to be gained by concealing information and would be costly to
release quickly to investors. Verrecchia (2001) discusses how if the management do
not hold any private information they fail to hold any strategic advantage over
competitors. This compromises future market share growth and the level of
profitability experienced in the future. On occasions where scandals are revealed
within companies that concealed bad news, external investors strengthen their belief
that managers clearly have incentives to avoid releasing negative news, which appears
to be a form of agency problem. As there is a clash of interests between managers
and shareholders due to a high asymmetry of knowledge about the company.

Myers and Majluf (1984) write that managers have three main positions to choose
from when holding asymmetrical information. Should they act in the interest of old
shareholders, new shareholders or simply ignore that conflict exists between the two.
If the management of a firm decides to take the interest of old shareholders into
consideration they believe that investors are passive in behaviour. However if
management sides the interest of new shareholders they are taking the view that old
shareholders will adjust their portfolios accordingly. By believing that old
shareholders are passive it explains the fact that, on average, stock prices fall when
corporations disclose that there will be an issuance of equity. It also allows for the
fact that corporations tend to favour debt instead of equity when looking for financing
externally. Although there are alternative reasons as to why management should
behave in a particular manner. Signalling information costs both time and money.
Guarding information from investors and rivals allows a corporation to understand the

10
implications from different actions and therefore which are possible or unadvisable.
Asymmetric information is a natural part of business according to Myers and Majluf
(1984) because managers gain a vaster amount of knowledge about the firm from
experiences as they work. However if a firm could inexpensively disclose
information about their investment strategies to investors they could explain the
reasoning behind choosing investments with a positive net present value. Yet this is
not the case as simply stating that the manager’s firm in question has great prospects
is not informative for investors. Disclosing intricate details would be beneficial to all
rival firms that in turn would minimise the benefit of the investment and cost a great
deal. Another motive for managers to disclosure information, both good and bad,
comes from labour disciplinary forces, which influence the reputation of the firm.
The possibility of civil and criminal litigation encourages managers to behave in the
interest of the shareholder. Gelb and Zarowin (2000) summarise the findings of
Welker (1995) by stating the when firms share a large proportion of information to
investors there is a lower bid-ask spread. This acts as a replacement for the surprising
information that is within the firm’s cost of capital. According to Leuz and
Verrecchia (2000) German firms that commit to high levels of disclosure not only
have a lower bid-ask spread but also higher trading volumes. Sengupta (1998)
furthered this area of study by finding that the cost of debt is reduced when a greater
proportion of information is shared with stockholders.

Managers are inclined to seep out negative information instead of making voluntary
announcements in a formal manner, according to the findings of Kothari, Shu and
Wysocki (2005). Ergo, strengthening the argument that managers prefer to hinder the
disclosure of negative information. Another finding was that managers preferred to
be secretive about bad news and then chance the possibility that successive events
will transform favourably. These findings concur with Anilowski, Feng and Skinner
(2005), as they found that managers concealed negative information from investors on
a consistent basis. Prior to these finding Myers and Majluf (1984) carried out
research concerning the reasons and benefits of holding superior information and
financing investments with issued stock. It was found to benefit old shareholders in
the long run even though the stock price did fall in the short term. Firms that used
risk free debt to finance investments did not experience a fall in stock price. This

11
suggests that there is great value in implementing a strategy of having alternative
funding for investments to that of issuing stocks at an attractive price.

This brings us to the interesting topic of how analysts impact the behaviour of
managers when disclosing information about future earnings. Fuller and Jensen
(2002) wrote how CEOs and managers within corporations face the dilemma of
meeting the high expectations from stockholders. Great efforts are made to achieve
strategic goals and meet budgets that were established the previous year; however
they can still be below investor’s expectations. There is a great deal of incentive for
managers to adjust forecasts, budgets and targets in order to be in alignment with
these expectations. In many circumstances these expectations are unattainable and
guarantee failure for the corporation. By rewarding employees on the basis of how
well they reach the corporation’s goals and budgets can cause behaviour that acts in a
counterproductive manner, according to Jensen (2003). In many ways employees are
trained to lie when informing budgeting systems because of the consequences of
failure being punishment and success being financial rewards. This diminishes value
because managers and assistants lie when creating budgets and therefore fail to have
any impartial information that are crucial for making effective strategic targets.

According to Rajgopal, Venkatachalam and Jiambalvo (1999) the owners of

institutions can afford to overlook current earnings as they have an informational
advantage, however their employees still have motives for manipulating short-term
earnings because they are appraised and rewarded on annual or quarterly basis 6. But
if employees are being paid to lie there are serious implications that should be
understood by all concerned. Jensen (2004) explains how corporations manage to
achieve the expected results that are forecasted by analysts they are rewarded with an
increase in stock prices. This higher stock price provides the CEO’s and CFO’s with
greater access to funding from capital markets. However if the corporation fails to
meet expectations by the slightest of amounts there can be serious implications to the
stock price. This scenario entices managers to work with analysts when managing
earnings and criminal charges against corporate officers continue to increase in
frequency. According to D’Avolio, Gildor and Schleifer (2001) there were 22 CFOs

6 Graves (1988)

12
in jail or awaiting sentencing due to accounting fraud from 1993 to 2000. However
the surprising fact is that 10 of these 22 occurred in 2000.

Numerous companies have been found guilty of manipulating forecasted earnings. A

prime example was given by Jensen (2004) concerning Microsoft. Whereby
Microsoft created reserves in order to reduce current earnings, enabling them to boost
future earnings 7. Only on 2 occasions where the forecasts missed and they were by 1
cent and by 2 cent. These results seem dubious and definitely were not derived from
a strategy of untainted value maximisation 8. Although accounting standards provide
the opportunity to make legal choices concerning how financial results are reported it
is extremely easy for managers to progress to making more aggressive decisions that
are classified as fraud.

There are a numerous hazards that come with conforming to the market pressure for
growth that is at an unattainable level. Fuller and Jensen (2002) explain that
overvalued stock can be just as harmful to the long-erm wellbeing of the firm as
undervalued stock. However many managers are not familiar with this statement and
fail to realise that their behaviour is damaging the corporation. This damage occurs
because stock prices impact the capacity the firm has to borrow, acquire and its cost
of capital. This therefore impacts the strategies set and the probability of long-term
success. With this in mind it could be argues that it is clear why managers feel the
pressure to manipulate results. So now we will look at why it pays to be honest and
acknowledge overvaluation in an attempt to avoid damaging the real value of the firm
according to Jensen (2004). However it is clear that advising the top managers to
manage the stock price down is likely to be perceived as a precarious strategy.
However when a firm is overvalued by billions of dollars there are serious
repercussions that will occur when the market is unable to justify the firms listed
value when looking at the financial results. If they disclose the real value of the firm
there is the possibility that they will add value again in the future. Jensen (2004) also
writes that if Enron had been brave enough to lower the value of the firm to its real
value they would still be running now even if they had been cautious about becoming

7 They settled with the US Securities and Exchange Commission. http://www.sec.gov

8 Jensen (2004) lists “Enron, Lucent, Xerox, Rite-Aid, Waste Management and Sunbeam” to have
been found lying about earnings in a similar fashion.

13
overvalued they would have kept a good reputation and avoided the huge
consequences that come with fraud.

As the impact that analysts had upon the market increased there role appears to have
experienced a transformation. According to Fuller and Jensen (2002) analysts are
specialists in understanding random events and phenomena such as seasonality.
Obviously companies cannot realistically grow in a continuous motion where the next
quarter’s results beat the previous each time. By attempting to meet unachievable
forecasts made by analysts, value is taken from the corporation. Jensen (2004) writes
about how analysts almost became media stars in the USA because television
channels such as CNN showed them regularly and took every word they said
wholeheartedly. When investment banking bonus pool began to be part of the analyst
income good analysts went from earning $400,000 to over $15 million each year. In
many ways honesty had been driven out of the industry because of investment
banking control that desired a biased analysis as this would be bring in more profit
from clients. This damaged the reputation of many analysts and caused large agency
problems internally. Analysts had such a great deal of attention according to their
forecasts that they began to determine the strategy that firms should take in order to
meet expectations. If the firm did not manage to achieve the targets set by analysts,
he market punished them. No longer were analysts attempting to comprehend and
analyse the corporation in order to forecast the potential future earnings that
represented the strategy of the company.

In order for managers to improve the current situation Fuller and Jensen (2002)
explain a number of actions that need to be taken. One of the main recommendations
made is that companies need to stop acting in accordance with the forecasts made by
analysts. However this indicates that managers are required to disclose the fact that
market expectations cannot be met and consequently that current stock prices are
overvalued. Thereby making corporations more transparent to investors and reducing
the risk of stock prices drifting too far from the fundamental value. By doing this
many of the uncertainties that cause speculation can be explained and analysts lose
considerable power within the market. Although the stock price will fall after
information concerning overvalued stock is disclosed it avoids a more disastrous
consequence. According to Fuller and Jensen (2002) CEOs and CFOs should only

14
assure investors of forecasted results that are justifiable after considering related risks
and doubts. One method of restricting exaggerated forecasts can be by demanding
explanations as to the reasoning behind expectation that are greater than the growth
rate of the industry. If managers compare their forecasts with rivals within the same
industry their needs to be a cause behind differences. Although it could be argued by
managers that disclosing too much information to rivals will destroy competitive
advantages, Fuller and Jensen (2002) reply that long run success depends on the
ability a firm has to do what rivals cannot. If a firm’s strategy is depending on rivals
not knowing what they are doing success will be short term.

Jensen (2004) in summary argues that value maximisation does not revolve around
the price of the stock. It is about creating value and will become a much more
sophisticated process than any moment up until now. These dangers are becoming
recognised to a great extent as time goes by and as Fuller and Jensen (2002) explain
new regulations on fair disclosure are addressing these issues. Although at the present
moment it is arguable as to the impact they are having on helping firms focus on
running the business instead of fixing the numbers away from the fundamental value.

A number of particularly interesting points are made by Myers and Majluf (1984)
discussing the situations corporations face when they have information that investors
are not aware of. According to finance theory investment decisions should be based
purely upon whether the NPV is positive. Issues such as the level of capital liquidity
at hand should be assumed to be high and securities can always be sold at a fair value
within the efficient capital market. Additionally Myers and Majluf (1984) explain
their outlook regarding internal or external funding having little significance upon the
success of an investment. They argue that when a manager has inside information
about an investment that provides confidence in its success a new decision is created.
This decision is simply a matter of how the manager wishes to affect the old
shareholders. If new shares are issued in order to raise external funding for the
investment they need to be set at an attractive price which in turn will negatively
affect old shareholders. Conversely to that of finance theory Myers and Majluf
(1984) explain how in some situations an investment with a positive NPV maybe
should be left because funding can only come from the issuing of new shares that will
have a negative effect on the value of the corporation, outweighing the value added

15
from the investment. Once their ability to issue debt with a low level of risk has been
exhausted, they argue that it is better to avoid investing, rather than issuing risky
securities that need financing. It should be noted that shareholders are wealthier on
the most part when sufficient leeway is created by firms that wish to invest in all good
investment opportunities. Indications appear to lead to the fact that losses are less
when there is a low level of uncertainty within the market about the value of assets
and expected investments.

This leads us to a more detailed look at the issues concerning insider trading. In many
cases mistaken accusations of insider trading are being made as a result of the
ambiguity around the term. According to Jensen (1988) there needs to be a more
clearly understood title applied that will ensure that the sharing of legally acquired
information between the producers of the important information and arbitragers is law
abiding. In the typical situation an investor may buy and hold shares in order to be
certain that potential bidders account for the full value of relevant information. If a
shareholder chooses to short their stock before an announcement they may potentially
gain from the overvalued stock price. An investor who believes that this scenario will
occur has information that has led them to believe that the price is overvalued due to
the fact that other investors are unaware of the information that they possess.
However this decision has its risks, for example if a takeover bid is successful that the
investor believes would not take place will miss out by selling prior to the
announcement. Therefore this risk allows the information that they do hold to be law
abiding because there is a lack of full information before the announcement. When
allegations are made with regards to insider trading it not only harms the reputation of
the corporation but it is also harmful to investors, producers of information and
potential takeovers.

Rajgopal, Venkatachalam and Jiambalvo (1999) tested two views that contradicted
one another concerning whether managers manipulate earnings because they are
afraid of failing to meet short term profit targets which may cause the holdings to be
liquidated, or whether managers have no incentive to manipulate earnings as
institutional owners are sophisticated investors that are not tricked by earnings
management. They found that there was proof of a robust negative link between the
total worth of discretionary accruals and institutional ownership. This agrees with the

16
view that institutional owners are sophisticated investors that cannot be tricked by
manipulating managers of earnings. Therefore signifying that managers are not
pressured to fix earnings results for investors that are short sighted. Although this
applies to situations where the level of institutional ownership is high and therefore
stock prices are probably reflecting the future earnings of the company. Although
Lang and McNichols (1997) discovered that the market’s reaction to earnings
announcements impacted the trading of institutional owners.

When there is a lack of long-term performance indicators Jacobson and Aaker (1993)
argue that managers have the incentive to manage current financial performance, as
investors will use the current profitability of the firm as an indication of the long-term
profitability of the firm. Previous research 9 had suggested that there was a negative
correlation between managerial ownership and the total worth of discretionary
accruals. Consequently, Rajgopal, Venkatachalam and Jiambalvo (1999) included the
degree of managerial ownership within the analysis, as this will influence the level of
conflict between shareholders and managers. It was also found in prior research 10 that
the size of the firm is also a factor that impacts the motives of managers to adjust
accruals. It was found that large firms were less likely to have managers that would
exploit their freedom in accounting in order to reduce political costs. Since larger
firms are more likely to be examined by security analysts there are fewer
opportunities for managers to manipulate earnings. Whereas institutions that are
approaching default are more likely to manipulate earnings in an effort to steer clear
of covenant violations 11. If corporate owners are near sighted upon accounting
earnings it was found that there is a reduced level of impact upon stock prices from
earnings, with companies with more institutional owners.

When institutions announce corporate earnings there is a reaction from the stock
market and analysts. The efficiency of this reaction was investigated by Liu (2003),
who clearly identified that the market reacted more hastily to earnings announcements
than financial analysts did. This was proven to be especially the case in pre-
announcement quarters and where the market reacted more strongly compared to the

9 Warfield et al. (1995)

10 Watts and Zimmerman (1978)
11 Duke and Hunt (1990); Press and Weintrop (1990); DeFond and Jiambalvo (1994); Sweeney
(1994).

17
gradual reaction by analysts. This was contradictory to previous researchers namely
due to the researching methods chosen. Liu (2003) chose to use a broader window in
order to capture entire reactions by analysts and the market and by considering more
than one quarter prior to forecasted earnings announcements. This allowed a better
understanding of forecasts at other horizons explaining the behaviour of analysts in a
more comprehensive manner. Using the event of corporate earnings announcements
as the variable of comparison was appropriate due to the fact that it is believed by
many to be the most recognised method of disclosing information that reoccurs
periodically. As financial analysts are respected for their knowledge and a
information intermediary in the stock market it is believed that their reactions are less
dramatic in order to prevent panic.

Purnanandam and Swaminathan (2005) investigated the reaction in stock prices after
seasoned equity offerings (SEO) announcements. They found that the market under-
reacted to the negative information provided from SEO announcements. However the
extent of the decline in stock price depended upon a number of factors. Firms that
were overvalued before the SEO announcement experienced a larger reduction in
stock price over a five year period. Further tests proved that these firms that were
overvalued earned lower returns around future quarterly earnings announcements
possibly due to the highly optimistic expectations held by investors. This agreed with
Loughran and Ritter (1995) who explain how both managers and investors become
overoptimistic with regards to the future prospects of a firm and under-react to news
given in SEO announcements, causing a slow degeneration to intrinsic value.

In addition it was discovered that overvalued SEOs gained lower levels of profit than
other under-valued firms. This suggests that by showing higher sales growth did not
benefit the firm in the long run and therefore diminished the difference in growth rates
between the overvalued and undervalued. Demonstrating that overvalued firms often
fail to transform the preliminary high growth rates into high profits. This finding led
Purnanandam and Swaminathan (2005) to discover that SEO investors focused upon
the initial growth rather than the profitability when valuing SEOs. This does no align

18
with the efficient markets explanation 12 and suggests that releasing news about high
growth rates can distract SEO investors from the topic of profitability.

Another explanation for the cause of SEOs experiencing a reduction in market value
on the day of announcement comes from Myers and Majluf (1984). They discuss the
process of managers disclosing private information on the day of announcement.
Providing investors with the information required to calculate that the firm is
overvalued. According to efficient markets behave rationally and lower the firm’s
market value to an intrinsic level. Suggesting that the more overvalued a firm is, the
greater the reduction in stock price after the announcement is made. Alternatively the
under-reaction argument states that the more overvalued a firm is the smaller the
decline in stock price after the initial announcement, however in the long run they will
experience a larger decline. However Purnanandam and Swaminathan (2005) found a
contradicting conclusion that states the most over-valued SEOs experience the
smallest decline in market value after an announcement is made, which agrees with
the under-reaction theory.

In the case of merger announcements high levels of volatility can be experienced in

the stock price of the involved firms. This occurs while information is released
concerning the organisation’s performance and procedures. However it is clear that
the CEO’s involved do not receive the same information in such a slow and detached
way. Another finding by Kothari, Shu and Wysocki (2005) was that managers
believe that external investors interpret negative information as more reliable than
positive news and therefore causes an alternative response in stock price. This
coincides with Kim (2002) who writes about the torpedo effect, which occurs when
the premium built up from consistently achieving forecasts is reversed when a firm
fails to meet the following forecast. However as good news is often an announcement
of sales figures and earnings, it is identified in revenues, which are released over a
longer period of time. Consequently giving the impression that there is a greater
amount of positive news than negative.

12 According to efficient markets, the market value will decline to intrinsic value on the day of
announcement. This should mean that there fails to be a relationship between long run unusual returns
and ex-ante valuations. Whereas in inefficient markets the explanation is that the most overvalued
SEOs should under-react more to the SEO announcement and also under-perform more in the long run.
Purnanandam and Swaminathan (2005)

19
After earnings announcements Kothari, Lewellen and Warner (2003) explain that the
movement in stock price can be predicted from the research carried out by numerous
researchers 13. Although there is an initial reaction to earnings reports it appears that
for the following three quarters the drift continues and then reverses in the fourth
quarter. With the use of behavioural finance it becomes apparent that this drift is
coherent with investor under-reaction. As investors were slow to react to public
announcements it seems that they were allowed to be surprised by changes in earnings
even though they could have been predicted earlier with the information that was
available. Alternatively it has been proven that in the long run investors actually
overreact to consistent positive or negative news. Overconfidence may occur from an
overvaluing of private information or from an investor believing that previous success
is based on their skill rather than luck. Signals that are public are possibly
underreacted to because they confirm private information that was available earlier
although this theory requires further research according to Kothari, Lewellen and
Warner (2003). In summary it appears that the market reacts to aggregate earnings in
an alternative way to that of corporations. From the empirical data collected it seems
that stock prices do not react slowly to earnings news and modern behavioural
theories fail to explain the cause of such findings, showing the need for further
research in this area.

Investors interpret information from disclosures and form a strategy of action

accordingly. However the process of social interaction within financial markets had
not been studied until Massa and Simonov (2005) empirically examined the
connection 14. Social interaction in this sense refers to when an individual is part of a
group of people that can affect their own behaviour. They categorised the four main
sources of social interaction as: educational, university based, professional and
geographical. Educational interaction was defined as a group of investors that
graduated with the same type of university degree. Whereas University based
interaction consisted of investors who attended the same institution. Professional
interaction occurred when investors had the same profession and geographical

13 For example; Ball and Brown (1968); Watts and Zimmerman (1978); Bernard and Thomas (1990).
14 Empirical evidence consisted of information regarding to 25,500 investors from various universities,
grade averages, location and other background information.

20
interaction comprised of investors living in a nearby location. By examining these
sources they attempted to measure the impact they had upon each individual’s
portfolio choice, stock market prices and volatility.

In areas such as social science and economics the topic of information perception has
been studied considerably 15. In finance it is particularly important to gain a better
understanding of the reasons why investors interpret the same information into so
many varying signals. Interaction between investors from the same community was
found to influence the decision of whether to invest in the stock market according to
Hong, Kubik and Stein (2002). However Massa and Simonov (2005) focused more
upon university based interaction and the influence this had upon stock selection.
This could then be compared to the other forms of social interaction previously
defined. There were a number of significant findings, which included university and
geographical based interaction being positively related to stock picking. Some stocks
were found to overweigh portfolios by 9% with investors from the same university
alumni. Investors were found to select the same stock as others located in nearby
areas or those that went to the same school. However there was a negative correlation
between the investors with the same profession suggesting that they fail to influence
each others stock picking. Alternatively investors with the same education had a
negative effect upon each other. It was observed that university based interaction was
the most significant contributor affecting portfolio choice, and the third single greatest
factor. Portfolio selection has been proven to be influenced by determinants such as:
hedging non-financial income risk, familiarity and information. However university
based interaction appears to have a stronger explanatory power, possibly because
while attending the same educational institution friendships are built over time and
bonds are made. This form of interaction was proven by Massa and Simonov (2005)
to also influence the decision made between direct and delegated investments. Stock
prices and their volatility were found to be reduced when investors reacted in a similar
fashion. This suggests the current stock prices can be explained by identifying which
groups of people are entering the stock market with varying beliefs and information
channels developed from their school years. Stock market bubbles can then be linked
with the generating that entered the market and forecasts can be made according to the

15 For example; Ellison and Fudenberg (1995); McFadden and Train (1996); Bala and Goyal (1998);
Betrand, Luttmer and Mullainathan (1999).

21
upcoming generation. This would lead to the view that investors can observe the
action of their peers and begin to understand where stock returns and volatility will
flow.

According to Boot and Thakor (2002) a company’s stock price increases depending
upon the amount that shareholders and management agree. This would suggest that
the higher the level of social interaction the more information can be gathered to unify
behaviour between shareholders. However this can only occur if investors are
capable of observing the actions of other investors, otherwise they will be unable to
base their own actions from their peers. Although if investors discard their own
information and rely purely upon the reactions of others, information will seize to
reflect the stock price and cause potential bubbles.

22
CHAPTER 3 - INVESTOR PERCEPTIONS

The way in which an investor interprets the information available regarding a specific
firm or the stock market as a whole is unpredictable. Yan (2003) discusses the
differences in impact that news has depending on whether it relates to an individual
firm or the entire economy. News concerning individual stock has an insignificant
impact upon the entire economy whereas news concerning stock on an aggregate level
has a significant impact upon the entire economy. This helps to explain why stock
prices react differently to the degree of information quality depending on the level of
significance held upon the entire economy. Although Veronesi (2000) argues that an
investor with a risk averse investment strategy would find a decline in information
quality a reason for the risk premium to also decline. However Yan (2003) argues
that this view applies only for the aggregate stock and not the individual stock as the
stock market portfolio is considered as the portfolio of all wealth in the economy in
the model used by Veronesi (2000). This shows that there are delicate connotations
that can be derived from previous asset pricing models. These findings have strong
implication upon the way investors react to available information. If there is a good
earnings surprise from a stock, there is an upward push as a result of the high
dividend recognition. As there is a lack of information regarding actual growth rates
for the stock in question investors adapt their forecasts concerning growth rates,
which cause the stock price to rise in accordance with the higher expected future
dividends. Alternatively if the growth rate of the economy is believed to increase it
could cause investors to translate the information to mean that the future marginal
utility to be lower and consequently reduce their demand for the stock which causes
the stock price to fall.

Until 2003 it was believed that both financial analysts and the stock market behaved
inefficiently to earnings news according to the investigation made by Liu (2003). For
example in 1990, Bernard and Thomas discovered that the risk factors could not
explain the volatility in stock prices after earnings were announced showing that the
stock market under reacted to the information provided in these announcements. In
1991 Mendenhall discovered that financial analysts also under reacted to earnings
announcement information. One year later Abarbanell and Bernard (1992) wrote that

23
analysts were more efficient than the market because the under reaction of analysts
could not be identified as a cause of stock price volatility. Liu (2003) found this
statement to be bewildering due to the high levels of competitiveness visible within
the stock market, not to mention the drive for traders to arbitrage away any mispriced
stock. This led to a discussion concerning the reasons why analysts may behave in a
less efficient manner. One potential explanation comes from the fact that both
analysts and allied corporations may wish to benefit from the information gathered,
before delivering the same information to the public. As a result of a large portion of
revenue coming from the equity research made by analysts for investment banks,
there can be motives for analysts to make calculations that are unique or claimed to be
more precise than that of active investors. Another major factor may come from
economies of scale, as there are far more investors than analysts. Therefore the
opinion of an analyst appears to be more valuable than that of an investor. When
looking at all these findings in whole it is clear that information has the power to
cause over reactions and under reactions. It is an opportunity to act scandalously in
the search for arbitrage and a source of high agency costs. Orcutt (2004) spoke about
the awareness needed by investors concerning the reliability of analyst reports. On
occasions the analyst may not display true personal opinions within the report, which
causes misleading stock ratings and manipulation of investor behaviour. This violates
the Martin Act161 and in December 2002 Merrill Lynch were one of ten leading firms
on Wall Street that made a $1.4 billion global settlement after finding sell-side
analysts guilty of misleading investors in order to benefit corporate investment
banking clients 16.

When information regarding future earnings is disclosed to investors Shane and Brous
(2000) found that there was an initial underreact that delayed the corrective role that
the surprising information held. This may have been largely due to the way in which
analysts underreacted and the information that was available in the interval between
earnings announcements. Other findings imply that the underreaction that investors
and analysts make from adjustments in earnings forecasts are corrected by non-
earnings information is surprising. These pieces of non-earnings information that is
surprising are used by analysts to predict the variance from earnings forecasts and

16 http://www.pbs.org/newshour/updates/settlement_12-20-02.html

24
influence the drift in returns after forecast revisions and earnings announcements. It
appears that because there is a constant underreaction by the market to the forecasts
made by analysts the non-earnings surprise information takes the role of significantly
correcting these underreaction made by the market and analysts. Empirical evidence
gained by Shane and Brous (2000) suggest that there is a correlation between two
major factors that are used to correct earlier underreaction from information about
future earnings. This correlation was found between forecast adjustments and
previous forecast adjustments when using surprising information that is of a non-
earnings form. These finding imply that irrationality is behind any drifts in returns
that take place following both earnings forecast adjustments and earnings
announcements. Consequently there is uncertainty as to the amount of irrationality
within analysts’ earnings forecasts.

If the drift consistently occurred after earnings announcements it would be expected

that the market would learn that they should not underreact to the next earnings
reports. However as the correcting behaviour appears to be coming from information
that surprises investors even though it is in non-earning information, it seems that the
source of the drift is not clearly identifiable and therefore blocks the market’s learning
process. By distracting investors and analysts from pure earnings information there
will continue to be underreacts to forecast adjustments made to future earnings.

It appears that there is a connection between the under reaction of both analysts and
the market according to Liu (2002). This contradicts a wide range of literature and
may give a clearer picture of the connection between information and investor
behaviour. Showing how analysts disseminate their research to investors and at
which moment in time they chose to do so according to trading decisions. Financial
analysts have been perceived as designated recorders of company information for
investors since Jensen and Meckling (1976) wrote about how agency costs of capital
were consequently reduced. Although employing an analyst to monitor another can
create more agency costs and was never identified outside of the financial literature
until there was a large increase in financial scandals. With new legislations and
inspectors in many countries around the world laws the finance workplace has been
going through many changes. On the whole investors and investment banks have
demanded the research of analysts in order to try and gain an informational advantage.

25
After analysing the Italian Stock Exchange, Belcredi, Bozzi and Rigamonti (2003)
found that there were two potential explanations for the anticipated reactions to report
releases. There could either be price sensitive information available slightly before
the event date, or there is the possibility of a leak in information that does not occur
on the time schedule designated by the Italian regulators. Unfortunately they were
unable to identify which possibility was the most plausible and will carry out further
research. By enforcing an effective method of disseminating information within
research reports on the Italian Stock Exchange website there has been a wide range of
strong protests by Italian securities houses. They argue that they are losing a
competitive advantage to foreign competitors that do not have to abide by the Italian
laws. However it could not be proven that there was any reaction within the stock
price upon the day that the information was released and that the information is
already incorporated within the stock prices when the research report is released.

This leads us to discuss another form of information that impacts investor’s

behaviour. Adams, McQueen and Wood (1999) carried out research concerning the
news of inflation rates and its impact upon high frequency stock returns. It was
decided to focus upon high frequency stock returns in order to grasp a better
understanding of previous researchers findings, which had used daily or quarterly
stock returns. Researchers such as Schwert (1981) and Hardouvelis (1987)
discovered that there was no correlation between inflation news surprises and stocks.
McQueen and Roley (1993) found the relationship between consumer price index
news and producer price index news with stock to be weak. However Jain (1988)
found an impact upon stock from CPI news, especially within the first hour of trading.

According to Rajgopal, Venkatachalam and Jiambalvo (1999) explain how

sophisticated owners of institutions are unlikely to be misled by manipulated earnings
results that are shown in accruals. Institutional investors hold an informational
advantage that allows them to avoid being overly focused upon the short-term
earnings of the firm. Schipper (1989) wrote how rigorous investor groups with an
expert knowledge base were likely to solve earnings management manipulations.
However Porter (1992) writes that there is a problem with the current system with the
United States of America because of transient investors that only focus upon the
immediate earnings rather than investing in companies that are currently building the

26
strength to produce long term earnings, due to a lack of understanding of the
fundamental prospects of firms. However Rajgopal, Venkatachalam and Jiambalvo
(1999) continue to discuss the power an owner of a firm has due to holding all the
relevant information. Shiller and Pound (1989) disagreed with Porter’s (1992) view
regarding institutional owners being transient investors that focus entirely upon short
term earnings because they conducted research that found sophisticated investors held
an advantage because they were financial capable of funding extensive research and
could therefore spend more time carrying out analysis on investments. This
viewpoint agreed with Lev (1988) who explained how sophisticated investors had
access to information that was unaffordable for the average individual investor and
due to have more resources at hand could make more informed decisions. They are
also less likely to be surprised by gains related to debt-equity swaps than individual
investors 17.

The behaviour of investors was researched in detail by Boswijk, Hommes and

Manzan (2003). Even though all assets with risk are available to any investor there is
a great variation between the decisions made by each investor. This is largely
because of alternate beliefs about the diligence of deviations of stock prices compared
to the fundamental benchmark. Investors create a forecasting strategy which is based
upon historic profits and therefore pay more attention to stock that has been
performing well. However over time it was found that investors occasionally
switched from the fundamental strategy to a trend strategy, which meant that there
was a belief that the deviation of stock price would return to the fundamental value.
Boswijk, Hommes and Manzan (2003) also found that investors tended to use
speculative information, instead of primary news, when deciding which stocks to buy.
This type of behaviour may be due to the possibility of gaining an extraordinary
return on investments. There findings also suggested that fundamentalist investors
with mean reverting 18 expectations had restricted resources to arbitrage the miss-
pricing away, which would bring stock prices back to their fundamental value.
Another finding was that in the during the mid 1990’s investors that were optimistic
and rationally bounded were strongly motivated by profitability on a short term basis.
This helps to explain the rise in stock prices, which occurred in the Internet sector

17 Hand (1990)
18 Mean reverting means that the stock price will return to the fair value after being overvalued.

27
when expected cash flows were high. In 1999 the estimated average price to earnings
ratio for Internet stocks was over 600 19. Researchers have discussed the reasons for
stock prices fluctuating away from economic fundamentals. There are two main
points of view, which are labelled as the rational expectations and market efficiency.

Rational theorists, such as Heaton and Lucas (1999), base their reasoning for the
decrease in equity premiums 20 upon economic fundamentals. It was discovered that
an increase in household participation within the stock market increased the span of
dissemination of equity risk, which could cause a reduction in the required risk
premium for each investor. Another finding was that investors have increased the
diversification of their portfolios since the 1970’s and therefore explaining why there
has been a decrease in the required risk premium by investors. However this does not
explain why stock prices were highly volatile in the 1990’s and only partially explains
the great increase in market valuations. Another factor is that corporations have
started to distribute cash to shareholders by repurchasing shares instead of paying
dividends. This has caused the price to earnings ratio to increase and as a result the
risk premium has decreased, which means the profitability of the asset is not
measured by investors.

Boswijk, Hommes and Manzan (2003) determined that there was a significant
distinction between investors behaviour when deciding upon an investment strategy.
Investors were either fundamentalists or trend followers but can change from one to
the other at any moment in time. Fundamentalist investors recognise that an asset is
incorrectly prices and therefore expect the stock price to return to the fundamental
price. Alternatively the trend follower assumes that there will be a continuous flow of
positive news in the near future and translates this into expected positive stock
returns. This was found to be consistently common in the late 1990’s within the
findings of Boswijk, Hommes and Manzan (2003). For four successive years annual
returns within the S&P 500 were over 20% and ratified the prediction of trend
followers. This swayed a lot of investors to believe in the trend following strategy
and caused stock prices to deviate yet even further from their fundamental value.

19 Ofek and Richardson (2002,2003)

20 The disparity among expected returns on the market portfolio of risk free bonds and risky stocks.

28
Fama and French (2001, 2002) found results which agree with Heaton and Lucas
(1999) while searching for empirical evidence of equity premiums decreasing, finding
that the real risk premium had decreased by 1.6% from 1872 to 1950. A similar study
using more recent data comes from Jagannathan, McGrattan, and Scherbina (2000)
who found that the risk premium had reduced to 0.7% since 1970 until 2000. This
suggests that investors expect the same return in stocks as that of 20 year government
bonds. Nevertheless this fails to completely describe any extraordinary movements
towards new fundamental values by stock prices, which occurred in the 1990’s.
Theorists such as; Barberis and Thaler (2003), Hirshleifer (2001), Cutler, Poterba and
Summers (1991), imply a behavioural rationalization remains within market
inefficiencies. Findings have tended to show that in the short-term previous winners
performed better than previous losers. However over a longer time span previous
losers performed better than previous winners. Taking the behavioural reasoning for
these findings, it is argued that investors invest between 3 months and a year under
react to news reports concerning the company and the economy. By only altering
valuations gradually to fundamental news the stock price rises higher than what is
justified by the fundamental news, thereby giving a positive ongoing correlation in
returns.

There has been a range of behavioural models formed over the last 10 years with the
aim of explaining these empirical findings. Barberis, Shleifer, and Vishny (1998)
concluded that investors were influenced by their desire to gain high future cash flows
which gave them a psychological bias. There model assumes that investors follow
two trains of thought when deciding which investments are attractive, and that all
information available is publicly available. They either over react to a flow of
optimistic news reports by interpreting it as signal for higher growth or they under
react to one positive news report missing an immediate asset revaluation. The BSV
model 21 considers the true earnings process to be a random walk for risk neutral
investors and identifies the persistence and reversal of stock returns. At a similar
moment in time Daniel, Hirshleifer and Subrahmanyam (1998) worked on a
behavioural model that considered the biases held by investors interpreting private
information. This model led to the assumption that investors overrated the private

21 Barberis, Shleifer and Vishny (1998).

29
information as a signal of large asset payoffs. However the degree of overconfidence
held by investors depended upon whether the public information agreed or conflicted
with the private signals.

It is an obvious fact that investors have different beliefs about the degree of risk that is
within each asset and what the future return will be, this causes heterogeneous
behaviour patterns according to Brock and Hommes (1997, 1998). There is also a
spread of opinions concerning the swiftness that the asset will return to its
fundamental rate. This largely depends on the weight each investor places upon
historic performances in relation to the future. Public signals can be interpreted in a
number of ways by each investor and make an estimated valuation from news
concerning earnings. Models formed by Biais and Bossaerts (2003) and Grundy and
Kim (2002) take these factors into consideration and are reinforced by empirical
evidence provided by Kandel and Pearson (1995) and more recently by Banber,
Barron and Stober (1999). There findings helped explain why financial analysts had
alternative forecasts and why trading volumes rose excessively during announcements
of earnings despite minimal fluctuation in stock prices.

An interesting explanation of heterogeneous investor behaviour comes from Miller

(1977) who wrote that whether an investor was optimistic or pessimistic had a large
influence on the action taken when experiencing constraints upon selling shares. If
investors are optimistic about a specific stock they influence the surrounding investors
as they purchase the stock and show their optimistic valuation. Whereas investors
that hold a pessimistic view about a stock will believe that they will be unable to sell
after purchasing and therefore never buy 22.

Jorgensen and Annete (2003) identified that half the population of investors believed
the stock market was overvalued but would remain so over a long time period, while
one in ten investors believed the stock market was undervalued. Alternatively one
quarter of investors believed that the stock market was accurately valued. These
beliefs from investors according to Frankel and Froot (1987 and 1990) are influenced
by financial experts who publicly broadcast past trend frequently.

22 The research by Miller (1977) was enhanced by Chen, Hong and Stein (2002) and then Hong and
Stein (2003)

30
We will discuss the factors that affect stock price volatility in accordance to the
behavioural finance argument. A great deal of research was carried out by Hirshleifer
(2001) concerning investor psychology in an attempt to explain the behaviourisms of
investors in accordance to various situations and beliefs. By looking more closely at
the rational approach it became clear that there is a complex framework that relies
upon decision biases, risk acceptance and misevaluations.

Hirshleifer (2001) wrote how investors were more likely to make biased decisions
when there is a shortage of information concerning valuing securities. As all
investors are susceptible to bias, mispricing can occur at any moment in time and may
not be identified until new information is disclosed. However even when information
is widely available it is feasible for investors to make misinterpretations that lead to
unwise decisions. Although investment banks and hedge funds have the expertise to
avoid common misinterpretations, and arguably the potential to reduce any substantial
mispricing, there lies the enticement for intermediaries to take advantage of irrational
clients. Investors that are overly confident and aggressively buy and sell in reaction
to legitimate private information signals could take advantage of liquidity traders
more profitably than rational investors. They may also profit from intimidating rival
traders that are also informed but on the whole it was proven that individuals who
trade aggressively are definitely not the most successful 23. This is largely due to the
higher transactions costs incurred without receiving any high returns.

There are two main sources that cause decision biases according to Hirshleifer (2001)
come from self-deception and being subject to emotion instead of reason. Individual
investors believe they are better than they actually are and consequently misguide one
another. However investors struggle to avoid these sources of bias because of the
difficulty in gaining the necessary level of expertise and the lengthy process of
changing ones mindset to avoid believing they are already proficient decision makers.
Individual investors that are extremely fond of a specific stock’s earnings prospect
may find that they continue these feelings onto high future returns causing

23
See Hirshleifer and Lui (2001) and Kyle and Wang (1997) for a more comprehensive description.

31
overpricing 24. This is due to the fact that the growth outlook for a stock cannot be
identified without considering the forecasted risk-adjusted return. Alternatively the
self-perception theory 25 states that as individuals repetitively carry out the same tasks
they form behavioural patterns and no longer think so intensely before making
decisions. They then later on need to withdraw their attitudes, emotions and internal
states from observations and the circumstances they were in because they have little
recollection of the events. However according to the expected utility theory investors
make their decision based purely on the profit made from each choice. Although
investors fear that their choice may result in a lower level of profit than that of other
potential choices, leading to regret avoidance behaviour. This type of behaviour
comes from the need to defend the self-esteem of the investor in order to continue
feeling confident about their decision-making capability 26.

Hirshleifer (2001) continues his discussion by mentioning how pure noise traders
overreact to positive feedback and this causes the stock price to become overvalued.
Consequently there are negative autocorrelations in long-term returns and therefore
there is the need for the stock price to return to its fundamental value. Rational
arbitrageurs tend to limit their time horizons to a shorter period in order to exit easily
and fear that the mispricing will become even worse before returning to a better price.
This uncertainty insinuates that mispricing may be arbitraged away too slowly at
times, whereas on other occasions it will overshoot. Understanding the behaviour of
investors is a very complex and broad subject and it has been proven that the
unreliable information is more likely to cause overreactions than reliable. According
to investor behaviour portfolio theory all investors such partake in all security
markets, however this is not how investors generally behave. It is clear that investors
hold a strong bias towards investing in their home country and local areas.
Employees tend to perceive their own firm as holding minimal risk and therefore
heavily invest within it 27.

As we know investors are humans and not machines and therefore can make errors.
Hirshleifer (2001) attempted to acknowledge this fact within the psychology-based

24 This is called the halo effect according to Nisbett and Wilson (1977)
25 Bem (1972)
26 Josephs et al. (1996)
27 Huberman (1999)

32
asset pricing theory. Over the years financial economists have begun to be more open
minded to accepting psychological explanations although it is still at an early stage of
research. Current arguments against the use of psychological reasoning for asset
pricing revolve around the difficulty in applying these findings into the current
financial markets. There is a great array of complications creating a procedure or
model that can allow for the vast variation in reactions taken by each individual
investor to the same information and neglect has been given to factors such as risk
aversion and multiple risky securities at this moment in time. Further attention needs
to be given in order to better understand the factors that influence the degree of
attention given to particular groups of stocks.

Mitchell, Pulvino and Stafford (2001) studied the obstacles that arbitragers face
regarding mispricings of corporate cross holdings. It was decided to observe the
scenarios where the parent firm was less highly valued than their owned stake of the
publicly traded subsidiary. One major finding was that faulty information was the
major cost that obstructed arbitrage opportunities 28. If investors are unable to access
the required information about the current economic situation it becomes impossible
for arbitrage to hold prices at a fundamental value. Additionally, faulty information
and high transaction costs can persuade arbitrageurs who do have expertise
knowledge but the ability to diversify becomes restricted. Highly specialised
arbitrageurs that do decide to use a less diversified strategy are taking added risks and
therefore require some form of added reward for doing so. Due to the uncertainty of
return levels there is a large wedge in possible stock prices that may be arbitraged
away depending on whether the capital market is perceived as imperfect or perfect.
Another finding by Mitchell, Pulvino and Stafford (2001) was evidence supporting
the view that arbitrageurs’ takings are gained from the loss experienced by investors
who hold the subsidiary’s stock. Long term prosperity of a subsidiary firm can be
identified by the degree to which noise traders positively influence the stock price
through frequent bidding causing an increase in mispricing. Subsidiary firms were
found to return to their fundamental value once arbitrageurs brought prices down.
However parent firms were found to hold no form of abnormal returns when investors
went long using an equally weighted portfolio. This finding was in accordance with

28 Merton (1987) and Fama (1991)

33
that of previous researchers 29, suggesting that losses are experienced by investors that
make mistakes and that in the long run the market forces them to depart. Although
the market constantly strives to keep stock prices at fundamental values the level of
success is certainly not adequate.

When the stock price of a firm continues to increase sharply from the fundamental
value it is called a bubble. Kindleberger (1978) explains how as the price continues to
rise, investors believe that the rise will continue and new investors are attracted in the
hope of gaining from trading the asset regardless of its earning capability. A great
deal of research was carried out by De Grauwe and Grimaldi (2004) concerning
bubbles and crashes taking the viewpoint of behavioural finance. According to the
efficient market view bubbles cannot occur in theory because investors will expect a
crash in the future and will not allow the bubble to begin. However while analysing
the way bubbles appeared and disappeared within the foreign exchange market it
became clear that investors acknowledged that they were incapable of understanding
all the complicated information available about the asset itself and therefore used their
own more basic system to forecast. This suggests that their behaviour cannot be
considered rational, as there are a range of uncertainties involved, however because
investors regularly check the profitability of their strategy and adjust their action in
accordance to perceived risk it can be argued that this is rationally bounded
behaviour. These adjustments take the form of technical trading or fundamentalism,
whereby investors forecast in accordance to past exchange rate movements or from
the belief that mean reversion will occur towards the fundamental price. These
factors were all considered within the model of De Grauwe and Grimaldi (2004).
By taking these factors into account it has allowed an explanation to be made for the
occurrence of crashes, where other ration bubble models have struggled. One
essential consideration is the fact that when a bubble occurs technical traders consume
the majority of the market, this prevents fundamentalist traders from impacting the
exchange rate. It became clear that both bubbles and crashes were more likely to
occur when technical traders behaved aggressively. Bubbles often occur during
instances where the fundamental worth of a stock receives a new reason to be

29 Friedman (1953) and Fama (1965)

34
revalued 30. Whereas crashes typically occur when the asset price is perceived as
overvalued, consequently causing trader behaviour to transform to an alternative
mean reverting approach. In circumstances where the majority of traders are cynical
about the fundamental variables that lead to the price of the asset the bubble was
found to continue for a longer duration.

Previous models 31 have considered that traders are split into two main categories, the
first being investors that are rational and believe that they understand the intricacy of
all financial aspects versus the irrational investor. Behavioural finance literature 32
over the past two decades has stated that the cause of distinction between rational and
irrational investors needs further research and is a challenge to discover. It has been
suggested that there are two main types of human beings in society and discussions
concerning the impact education, social settings and beliefs have upon the level of
rationality held by the investor. However it is impossible to identify the reasons as to
why society might be divided into these categories according to De Grauwe and
Grimaldi (2004) and therefore a more simple assumption was used in their own
model. This assumption was that human society consists of agents whom hold a
limited ability to grasp the intricate details of the financial world. Therefore all
investors are bounded by rationality and the model can be more dominant than
previous models. As each individual trader cannot comprehend and analyse the
whole information available more simplistic forecasting rules are applied. Rationality
still prevails in the sense that investors monitor the profitability of their choices and
are willing to switch strategies if their limited knowledge calculates it to be the more
profitable selection named as bounded rationality.

In summary the findings of De Grauwe and Grimaldi (2004) were that once a bubble
surfaced it caused a more and more investors to follow suit. As the upward trend
continues the forecasting rules used calculate an increase in profitability causing more
technical traders to be lured into the market. It was identified that at the peak of the
bubble the market consisted entirely of technical traders. This suggests that there are

30 Although the empirical evidence for this model came from exchange rates De Grauwe and Grimaldi
(2004) clearly explain how this applies to a range of market types.
31 Blanchard and Watson (see Blanchard(1979), Blanchard and Watson(1982))
32 For Example; Tversky and Kahneman (1981); Thaler (1994); Shleifer (2000); Barberis and Thaler
(2002).

35
scenarios where investors are not willing to take diverge to the fundamentalist
outlook. Confusion occurs over the reason for why fundamentalist traders do not
prevent the bubble from emerging by taking the opposite position. It would be
profitable for fundamentalist traders to sell when the stock deviates from the
fundamental value. Another significant finding by De Grauwe and Grimaldi (2004)
was that crashes occurred rapidly while bubbles rose steadily. They explain how this
occurs because during a bubble technical traders are conflicting with fundamentalist
traders, which slows down the growth of the bubble. However when the bubble
consists entirely of technical traders the fundamental strategy begins to become more
attractive and the moment when they mean revert and change their strategy to the
fundamentalist rule there is hasty crash.

Theories of trading began to appear recently in order to attempt to understand the way
in which investors behave and react to information disclosed. At the moment there is
no outstanding model of trading that is practiced. However Milgrom and Stokey
(1982) stated that a trader that behaves rationally would fail to trust of any other
individuals on the other side of their own trades and because of respecting other
investors’ knowledge and actions would decide it better to not trade. They also argue
that information about payoffs, both public or private, concerning securities would
cause price changes but not trading volume. This would be a result of traders acting
rationally and having a Pareto optimal 33 allocation of risky securities. Meaning that
traders act in order to improve their position without harming any other trader.

Investor’s reactions are namely so unpredictable due to the fact that every public
signal can be interpreted in a different way. Kandel and Pearson (1995) created a
model for trading that allow for this consideration. They explain how individual
investors fail to consider the reason why other investors trade. These models state
that stock price volatility is positively correlated to the frequency of trades. Although
if these models were to be applied to the EntreMed scenario discussed previously
there is a lack of clarity concerning the type and time of the signal sent to investors
and the reaction is still unexplained.

33 For an introduction in Pareto Optimality see: http://en.wikipedia.org/wiki/Pareto_efficiency

36
Another model that relates to the behaviour of traders was designed by Odean (1999)
in order to model overconfidence. In a similar way to Kandel and Pearson (1995),
and Odean (1999) also identified that individuals interpret signals in different ways
and this leads to an alternative forecast for the potential of a firm. Due to have such a
high level of confidence the investor puts more focus upon certain types of signals
and ignores other investor’s information and predictions of future stock prices.

One model that suggests that investors behave in a semi rational manner was created
by Merton (1987). He states that investors who only trade in the familiar are
irrational because they are restricted because they avoid obeying the classical finance
paradigm. As they are incapable of buying an index portfolio of diversified stock
which are unfamiliar with. However this does mean that they also avoid receiving the
negative consequences of using inferior information or being in the situation of
having no information available. Merton concludes that unfamiliar firms that have a
smaller investor base are more likely to hold a larger expected return than other firms
with fully available information. However what is familiar to one investor is
unfamiliar to another and therefore is considered to be controversial by numerous
financial theorists. Merton’s model considers a range of empirical regularities that
otherwise are considered anomalous in models that are traditional with complete
information in perfect markets.

Wurl (2004) created a new theory in an attempt to reinforce the previous behavioural
finance arguments. By focusing upon human capabilities within an economic setting
and the long-term consequences of decisions made. This improved the possibility of
making a respectable investment decision based upon a behavioural finance approach
that previously had been perceived as unreliable within the finance industry. In order
to apply this new theory Wurl (2004) explains a number of rules that need to be
followed depending on whether an equity portfolio is being constructed, managed or
secured from risk.

When constructing an equity portfolio Wurl (2004) explains that it is crucial to select
firms that have a number of key signs of success. There should be a proportional
amount of debt to equity with positive and increasing cash flows. Sensitivity to
customer needs should be present and employees should be rewarded for performance

37
through good pay and promotion. With regards to the products or service that the
firm provides they should be at the top level and therefore preferred by customers to
that of competing firms. Dominance within the industry should be the strategy in
place and avoidance from diversifying into areas where their knowledge base is less.
By selecting firms that have the mentioned traits there is more chance of selecting
stock that will experience and upward trend movement. Wurl’s findings showed that
there was no convincing necessity to diversify an equity portfolio if an investor
followed the guidelines. This simply is because the firms chosen according to the
benchmark are safe stock, as there is minimal probability that the firm will go out of
business in the following years. As the firm’s chosen all have outstanding financial
performance there is a strong chance that they will experience an increasing
movement in stock price. Diversifying an equity portfolio requires minimising the
risk taken against the expected return and by selecting firms with no apparent risk the
need to diversify has been eliminated according to Wurl (2004). This challenges a
number of traditional finance investment theories such as passive and alternative
investment methods.

According to Wurl (2004), once the equity portfolio has to be assembled it needs to be
managed on a basis of continuous monitoring of trends. With any great investment
there needs to be a purchase, a holding period and a sale. Therefore it is crucial to
know what moment in time requires which action and due to the fact that asset prices
follow trends and not a random walk there needs to be an awareness of where the
current price is along the trend. Valuing the fundamental price of a stock can be
difficult as trend movements disturb validity. Using sophisticated tools to observe
trends is encouraged to increase the knowledge base of the investor and it should be
understood that being fully invested is not always the best strategy. If there is a lack
of qualified firms that reach the necessary requirements it would be better to invest in
bonds, rather than investing in unqualified firms or attractive stock that is late in the
process of a high trend. When attempting to find the base point of any trend there are
complications, as any type of numerical analysis lack full credibility. Therefore Wurl
(2004) explains that investors should build a collection of successful companies and
persistently examine the compliance of the required quality requirements. Although it
should be noted that valuation methods are important to get an estimation of the
positive difference between intrinsic value and its markets value, which provides the

38
investor with a level of safety. Wurl (2004) discovered that trends begin after a
random walk and the moment when the transition occurs is unpredictable. Trends
once occurred are also capable of crumbling early and therefore investors should no
jump on and off a trend in accordance to short term price movements. It should be
understood by investors that there are larger trends that have numerous short term
movements within them. Therefore investors should not risk losing the trend early on
due to short term movements, however holding the stake for too long entails risking
what was gained in the trend. Although this does not mean that investors should
immediately sell and collect profits after major price movements because the firm’s
fundamental values are in place and therefore is likely to prevent any major
downward trend. Awareness of the stock’s liquidity is important in order to provide
sufficient capability of selling stock in a controlled manner. This shows the
importance of using professional tools for measuring the extent of trends occurring.

If all investors in the market were to adopt this method it would still be impossible for
investors to all invest in the same firms’ stocks as every investor is limited by fund
restraints. As Wurl (2004) states, investors all hop in and out at various moments in
time and therefore it is crucial to have a high quality trend following system and a
method of valuing the stock price to understand the performance of investment. If it
is not possible to apply the theory of Wurl (2004) it would be best to invest in an
index or a diversified portfolio of assets, in accordance to mean variance optimisation.

Although Wurl (2004) attempted to sharpen the behavioural finance argument to

investors it appears that the efficient market argument holds with the fact that trends
are unpredictable in occurrence and possible randomly. However the fact that trend
movements are not random supports the behavioural finance argument.

This leads to the fascinating topic of how investors perceive signals from firms
concerning issuing shares. It appears that investors interpret the action of an issue as
a negative or less positive sign and the decision to not issue shares as good news.
Consequently when a corporation does issue shares it influences the price investors
are willing to pay for the issue, which can force managers to change their investment
strategy. Corporations attempt to avoid this problem in a number of ways according
to Myers and Majluf (1984) in reply to the influence asymmetric information can

39
hold. One major strategy held by corporations is to have a certain level of capital
available for potential investment opportunities. This allows all opportunities with a
positive NPV to be taken by the firm giving them a strategic advantage over rivals
who do not have ample financial slack. Corporations that believe that old
shareholders rebalance their portfolios in reply to their perceptions from the action
from firm’s do not need to have a high level of available capital at their disposal as it
has no bearing on the investment decision process.

Investors are often categorized as a group that are all identical and there results are
gathered as an average figure because the number of traders is vast. However Coval,
Hirshleifer and Shumway (2005) took a closer look at whether individual investors
were beating the market consistently. It was proven that in long horizon returns
highly skilled investors outperformed poor investors by approximately eight percent
each year. There findings imply that certain investors have a superior investment
ability and that others persistently underperform. This leads to an interest process that
investor may go through to transform from poor traders to highly skilled traders.
Frequent trades at a loss may be a teaching tool for poor traders to become good
traders; however this is arguable as it may just continuously prove that they should
not trade at all. Highly skilled traders have been found to have the ability to move
their accounts to venues that are either trade at a higher leverage or at a lower cost.
These findings by Coval, Hirshleifer and Shumway (2005) disagree with the efficient
market hypothesis because investors that consistently outperform the market did not
do so solely from inside information. This leads to the inquiry of how valuably large
brokerage firms consider the information held within the trades made by their
customers. There was a failure to see any pattern of firm types chosen by highly
skilled traders or by underperforming investors. By exploiting information held
within the trades made by investors a risk adjusted return of approximately five basis
points was gained each day.

40
CHAPTER 4 - INFORMATION VALUES STOCK PRICES

We will now look more closely at the impact actual news has upon the volatility of
stock prices. So far we have discussed various types of information and how they
influence stock prices. However there we will now take a deeper look at these
influences and impacts.

Binswanger (2004) found that, from 1953 until 1982, unexpected news caused a much
greater impact upon share prices than after 1982. In the 1980’s and 1990’s there have
been a number of speculative bubbles that seem to have created more resistance to
fundamental shocks. These findings came from estimating various SVAR models
within the USA that account for real activity variables. This placed more importance
upon real activity variables than most other models that used dividends or earnings as
the fundamental variables. It was proven to be of importance as to which
fundamental variables were including within the SVAR models. When the
fundamental variables chosen were factors such as GDP or industrial production the
degree of error variance in forecasts were considerably larger than when using
dividends or earnings. When using a trivariate SVAR model that included interest
rate variables there was a slight increase in the forecast error variance, when
compared to bivariate SVAR models. This also occurred when both earnings and
dividends were included in the model. From this model it became clear that
fundamental shocks became far less influential from 1982 until 2002.

A great deal of ambiguity lies around the fair value of stock prices in relation to the
true future of earnings. Rajgopal, Venkatachalam and Jiambalvo (1999) investigated
the association between earnings management and institutional ownership. Numerous
financial publications have argued that institutional investors pressure managers to
adjust earnings in an attempt to display long-term profitability. This pressure is
believed to be as a result of investors interpreting short-term profit as a sign of firms
liquidating their holdings. Bushee (1998) wrote how institutional investors that had
highly diversified portfolios and used a momentum trading strategy pressured
managers to reduce expenditure on research and design. However Rajgopal,
Venkatachalam and Jiambalvo (1999) do not appear to have findings that agree with

41
this viewpoint. They found that the total worth of discretionary accruals lowered in
relation to institutional ownership. This complied with the opinion that managers
recognise that owners of institutions have more information than individual investors
and therefore benefit less from managing accruals. Stock prices of institutionally
owned corporations were found to display a larger share of the information in
forecasted earnings in relation to current earnings. This suggests that institutional
investors behave differently to individual investors, as they are aware of future events
after current earnings. In whole these findings support the viewpoint that managers
do no manipulate earnings as the owners of institutions are aware of more than just
profitability levels on a short term basis.

In the long-term Litner (1956) explains that when a firm splits its share they are
signalling to investors that they expect long-term profitability. Providing an
indication of confidence from the firm’s directors that paying a higher level of
dividends is possible. By signalling confidence and strength investors adjust their
expectations from the firm’s future earnings. There was no evidence to support the
argument that dividend policy affects the market value of the firm. Jaffe (1957) also
discovered that on 4% of firms had a period greater than 130 days between the
announcement date and effective date. This leads us to believe that the market
understands that the announcement of a split is the moment to adjust expectations of
income from shares, therefore suggesting that the stock price fully reflects the
information concerning the connotations of the split. This supports the viewpoint that
the market is efficient and that a split in stock creates anticipation for higher future
dividends, although a split alone does not create higher expected returns unless inside
information regarding changes in future dividend payments is available.

Boswijk, Hommes and Manzan (2003) supposed that the fundamental value of each
asset was widespread information and accounted for that in their model. Although it
should be understood that the attitude held by investors is heterogeneous concerning
the rate that the stock price takes to return to its fundamental worth. Even though
investors are aware of certain stock being overvalued there is a range of opinions
regarding the time horizon that the mean reversion will occur. Investors with an
optimistic outlook will expect the trend to continue in the short term, unlike the
pessimistic investors who are fundamentalists and expect the stock price to return to

42
its correct price shortly. Support for this postulation comes from a number of earlier
researchers who proved that investors hold a range of dissimilar views.

A less general field of research, concerning the factors that comprise oil stock prices
was carried out by Lanza, Manera, Grasso and Giovannini (2003). As the oil and gas
industry continues to go through changes in international policies that attempt to
reduce climate changes, the shareholder values of the company are expected to
change. Particular focus was placed upon the long term financial determinants of the
stock prices belonging to six oil companies, with the use of a multivariate
cointegration technique and vector error correction models. The empirical data
consisted of weekly oil stock prices that were examined with relevant stock market
indexes, exchange rates and future oil prices from 1998 until 2003. There was
evidence of non-US companies experiencing a decrease in their stock prices when the
dollar appreciated in relation to the local currency 34. Another major finding was the
level of significance the market index had for companies that had a capitalization
larger than the stock market. There was difficulty in determining a number of other
uncertainties, as they appeared to be firm specific cases rather than a general
conclusion. However in summary Lanza, Manera, Grasso and Giovannini (2003) did
manage to gather empirical evidence that the long-term dynamics of oil companies’
stock values are significant to major financial factors.

When determining the future stock price Arshanapalli, Belcher, Ma and Mallett
(2004) concluded that information from past prices is of valuable assistance. Their
data consisted of 1095 weekly Wednesday 35 observations from 1981 until 2001 over
nine stock markets. Stock indices were chosen instead of individual stock prices in
order to minimise the predicament of negative serial correlation. Their findings
opposed a number of previous researchers by claiming that the price movements
within stock markets contravene the random walk hypothesis. According to
Arshanapalli, Belcher, Ma and Mallett (2004) there are three factors that construct the
price series. Information concerning stocks can be either expected or unexpected.
Expected information is systematically reflected into the stock price whereas

34 As the transaction currency in oil markets is USD.

35 Choosing Wednesday minimised the day-of-the-week effect that occurs in major stock market
indices.

43
unexpected information influences the behaviour of noise traders. Another factor
influencing the price series is the behaviour of market maker’s, which is recognised
within the bid-ask spread and is a negatively auto-correlated component. One major
finding was that foreign stock prices failed to react rationally to unexpected
information and prices did not adjust immediately. However this finding depended
heavily upon the chosen time horizon and when adjusted to a one month holding
period, the null hypothesis of a random walk could not be rejected. French and Roll
(1986) and Lo and MacKinlay (1988) showed that daily and weekly individual
security returns are negatively autocorrelated. However Conrad and Kaul (1988), Lo
and MacKinlay (1988) find that weekly portfolio returns demonstrate positive serial
correlation. This clearly supports the evidence that the time horizon needs to be
carefully considered.

In order to identify the connection between risk aversion and stock prices within the
S&P 500, Fair (2002) analysed data from 1957 – 2000 with particular focus upon
each firm’s price-earnings ratio. There was a clear finding that the risky firms did not
experience larger increases in Price to Earnings (PE) ratios than less risky firms.
From 1996-2000 dividend growth was higher than the figures from 1957-2000,
however growth of earnings was on average lower. As there was no evidence of a
decline in risk aversion levels the reasoning behind the large PE increases were likely
to be caused a more temperamental factor. One hypothetical explanation for these
findings may derive from the existence of unrealistically high expectations of
earnings in the future, making rises in PE less influential than a drop in the level of
risk aversion held by investors. One observation by Fair (2002) was that the level of
risk aversion held by investors decreased on average from 1995 to 2000. This could
be explained by Campbell and Cochrane (1999) who found that during periods of
economic growth, investors tended to be less risk averse. Whereas during recessions
there was evidence of investors becoming more risk averse. However a decrease in
risk aversion would be expected to lead to an increase in PE ratios for firms with
higher risk. Although this may not have been the case as the increases in PE ratios
were relative to real long term rates of interest. Changes in risk aversion levels by
investors could have been caused by the proposition of Shiller (2000) who writes that
investors change their attitude toward risk taking as more opportunities to gamble
occur. An alternative theory was formed by Glassman and Hassett (1999) who

44
describe how stock prices rose from 1995 because investors reduced their valuation of
overall risk levels for stocks in relation to bonds. Therefore the suggestion is made
that investors may have measured PE ratios in the same manner as prior to 1995 while
valuing the degree of risk on a new scale, which would imply that low risk firms
gained higher increases in earnings.

It was identified that mean reversion occurred more frequently within larger stocks
but could take numerous months before being shown in the stock price, according to
Lewellen (2001). Findings from this research revealed that a range of common
beliefs were confirmed to be false. Firstly Lewellen (2001) discovered that there was
in fact strong evidence of mean reversion within stock prices over both 1 year and 5
year returns. Over an 18 month period, between 25% and 45% of annual returns
experience a mean reversion. Specifically for 5 year horizons there was a fall of stock
price between 10% and 15%. Secondly, using monthly regressions, there was
evidence showing that both small and large portfolios experienced mean reversions.
Only the very smallest and very largest portfolios experienced a minimal level of
mean reversion. Contrary to common belief the strongest mean reversion did not
occur between 3 and 5 year horizons. Empirical evidence showed that 1 year returns
had the most trustworthy forecasting strength, especially after 1945. However a
strong significance was present in the five year returns and marginally present in the 3
year return.

Belcredi, Bozzi and Rigamonti (2003) analysed the impact that research reports had
upon stock prices. They chose to investigate the market price reaction of stocks listed
on the Italian Stock Exchange compared to changes in analysts’ recommendations 36.
Using a collection of 5000 research reports they dispersed the information that has
been available since 1998 according to Italian law 37. This means that there are two
event dates available for the empirical data and that the market is informationally
efficient and therefore should have no major reaction once the public access the
released information. This process of stock prices adjusting to new information was
also investigated by Fama, Fisher, Jensen and Roll (1969). They found that there was

36 Prior to this research papers have been written by O’Brien and Bhushan (1991), Brennan and
Hughes (1991), Stickel (1995), Womack (1996) and Chung (2000).
37 The Italian Stock Exchange Commission enforces equal admission for all clients to research at a
securities house and at no cost postponed public access to research reports.

45
a great deal of evidence to suggest that stock prices changed almost independently
and argued that it was due to an efficient market that hastily adjusts to new
information. However until 1969 there had not been a great deal of empirical testing
to prove these statements and therefore a new event study was proposed in order to
measure the impact of various actions and events on security prices. It was found that
companies tended to split their shares during unusually good periods, which was
when share prices were at their highest.

In order to understand more about how well stock returns integrate information about
future earning Gelb and Zarowin (2000) carried out a new approach. Unlike previous
researchers there was focus placed upon the benefits given to the stock market when
companies increase the level of disclosures to investors, instead of the benefits gained
by the company. They measured the relation between prices and future earnings
directly, avoiding the use of forecasts from analysts. Companies that provided regular
disclosures of information experienced higher changes in future earnings returns than
companies that rarely disclosed information. Considering that the main reason for
providing disclosures is in order to supply investors with more details of future cash
flows. Gelb and Zarowin (2000) found new empirical evidence that supported the
view held by many investors, regarding the fact that the stock market benefits from an
increase in information disclosures by companies. This leads to the conclusion that
enhanced disclosures increase the efficiency of future earning signals. Although there
is no implication that stock prices become totally efficient once all relevant
information is disclosed by the firm in question.

Yan (2003) found that the behaviour of stock prices varies depending upon whether
measured on an individual level or aggregate level. This conclusion was formed due
to there being a correlation between stock returns and earnings surprises on an
individual level; however on an aggregate level the correlation was negative 38.
Another major finding was that as the quality of information for a stock declined there
was an increase in risk premium. However if the stock was a relatively large portion
of the economy the risk premium decreased as information quality declined. It is
important to understand why Yan (2003) found results that contradict previous single

38 This complies with Ball and Brown (1968) who found that earnings surprises were positively
correlated with individual stock returns.

46
risky asset models. By considering that aggregate dividends within the economy are
tradable and perceiving the stock market as only a part of the economy, thereby
arguing that the stock market to be indifferent from the rest of the economy.

In relation to the Internet, Rajgopal, Venkatachalam and Kotha (2000) researched the
impact that web traffic had upon the stock prices of Internet companies. Although
there was a limited number of time-series observations relating to the financial
performance of Internet companies there were some interesting findings. There was a
clear link between the number of monthly visitors to a firm’s website and the stock
price of the company in question. This significance was found using a regression of
pure financial statement information versus Internet share prices. One reason for the
stock markets appreciation of web traffic levels may be due to the signal it appears to
provide regarding a company’s future sales. Another major finding was that as the
number of articles written about a company increased the more potential each visitor
has to create their own opinion about a company. As the media writes articles that are
out of the control of the company it relates to there is a feeling of reliability by the
reader, rather than a marketing campaign attempting to increase the number of
visitors 39.

An interesting finding regarding increases in trading frequency was found by Chen,

Hong and Stein (1999). Paying particular attention to individual stock, it was
discovered that there was a higher degree of negative skewness with stocks that
encountered an increase in trading frequency. They were also found to have high
levels of market capitalization and had positive returns over the prior 3 years. One
explanation for small cap stocks being more positively skewed than large cap stocks
may be due to the fact that managers would rather announce good news immediately
and delay the release of bad news. However managers of small companies are not
scrutinised by analysts to the same extent and therefore have more freedom to hide
bad news.

39 Wartick (1992)

47
CHAPTER 5 - METHODOLOGY

We will now look at previous researchers specifically relevant to both stock price
volatility and news.

With regards to previous research that has been carried out on the impact news has on
stock price volatility. Antweiler and Frank (2006) used sophisticated methods in
order to analyse over 200,000 news reports. They specifically focused upon news
reports from the Wall Street Journal. A great deal of technology from the research of
computational linguists was applied in order to identify news reports relevant to
corporations and specific types of events. They state that news is statistically
predictable although this cannot create large financial gains. They explain how after
an initial news report there is a greater change of further news and that the number of
trades increases after news from the Wall Street Journal. Conversely to the
conventional view, whereby markets intake information and adapt quickly and
efficiently, Antweiler and Frank (2006) found that on occasions the NYSE, NASDAQ
and AMEX took weeks to fully absorb the news from the Wall Street Journal. Papa
(2004) states how the modern portfolio theory fails when market turbulence forces the
stock prices down there is a correlation with the rising of securities, asset classes and
international stock markets. However on most occasions the efficient market
hypothesis 40 is an applicable explanation to the immediate jump in stock price after
the release of new news. Another finding by Antweiler and Frank (2006) was that
investors frequently overreacted to the new news and therefore a slow and long-term
reversal occurred within the US stock markets during the 30 years of data analysed.

More specifically to Engle (2000) used the GARCH model to forecast and capture the
volatility characteristics of the Dow Jones Industrial Index over a twelve-year period.
Where findings suggested that volatility consistently mean reverted and that negative
impacts on returns influenced volatility approximately four times more than positive
impacts on returns. A major problem with the GARCH specification was the
dependence results had upon the sampling frequency. Gallo (2002) investigated the
effectiveness of the GARCH model when measuring the impact overnight surprises

40 Fama (1991)

48
have upon the intra-daily volatility. Although there were findings showing an
opening surprise bias the extended, simpler, extension of the univariate GARCH
model was favoured. Although it is clearly stated by Engle and Victor (1991) that
EGARCH is quite successful at capturing the impact news has upon stock price
volatility. As it also allows for the leverage effect which acknowledges that negative
news has a greater impact that positive news on stock price volatility. However due
to the need for large samples to gain significant results 41 the method used by Dolde,
Saad and Tirtiroglu (2002) would be more appropriate for sample groups of 40
observations.

We will now discuss in more depth, the way in which previous researchers have
handled and tested data relevant to measuring stock price volatility before and after
news reports.

As a means of examining any sudden movements in volatility Haugen, Talmor, and

Torous (1991) modified the approach of Wicherm, Miller and Hsu (1976) which is
based upon an F test. By increasing the measuring accuracy there is a greater chance
of capturing any connections between the timing of news reports and sudden volatility
shifts. The modified model locates volatile events that occur within the 1% critical
regions of a two tailed F test. In order to avoid measurement errors, biased coefficient
estimates and spurious autoregression Dolde, Saad and Tirtiroglu (2002) explain that
the end of the month effect 42 has to be considered. Whereby acknowledging that at
the end point of observation windows the level of volatility is in a process of shifting.

As Dolde, Saad and Tirtiroglu (2002) show it is clear that the most accurate method of
testing for stock price volatility changes is by using a two-tailed F test on the variance
ratios both before and after. This appears to be the most modern and updated method
of testing stock price volatility in relation to news reports.

41 When applying EGARCH to data sets of 40 observations the R2 was on the most part negative.
42 Dolde, Saad and Tirtiroglu (2002) - Merton (1980) and French, Schwert and Stambaugh (1987)

49
Data Handling

We will now discuss the way in which major news reports were chosen and how the
data was collected and handled.

News selection process

It was decided that news reports that reached the BBC history archive as major
headlines in the opinion of the British public would be chosen. In total there were
198 news reports 43 classified as major between June 11, 1987 and November 25,
1999. These can be found on the BBC “on this day” website 44. Although there are
countless selection methods that could be used it was deemed most suitable to use the
news selected by a news provider that has a world-class reputation for being less
biased and global coverage. Using a British news provider also seemed most
appropriate when the data to be analysed would be from the FTSE 100.

FTSE 100 Price Index

The main reason for selecting the FTSE 100 instead of any other stock market, was
due to the large number of papers that have been written regarding the impact
extraordinary news reports have on US markets. It was of interest to see whether
similar findings would be discovered in a UK based stock market using a UK based
news provider’s selection of major news. Using Datastream software it was possible
to collect the end of day index price over the 12 year period of news reports collected.
Beginning on May 14, 1987 and ending on December 23, 1998. The main reason for
selecting this time frame was in order to use a similar time period to that of Dolde,
Saad and Tirtiroglu (2002). It would have made for a more sophisticated analysis had
it been possible to collect a more frequent rate of prices. However using the end of
day price was identical to previous researches and therefore would enable any results
to be compared. Although it was possible to obtain the end of day stock price for
each company and separate them into industries. It was felt that due to the news
being non-sector specific it would be more appropriate to focus on the stock market as

43 Appendix: Table 14 – Headlines of all 198 Major BBC News Reports

44 http://news.bbc.co.uk/onthisday/hi/years/default.stm

50
a whole. Once all the end of day stock prices had been gathered the daily returns
were calculated using Eviews software. After inputting the data into the program the
daily returns were calculated by using the formula dlog(x) = log Xt – log Xt1 45.

Observation Blocks one and two

In order to gain an idea of what happens to the index price before and after the release
of the news report two observation blocks were created. Observation block one
consisted of the index price over 20 trading days plus the day that the news report was
released. Observation block two consisted of the following 20 trading days 46. In total
198 groups were formed each with observation blocks one and two. The daily
variance and daily returns were calculated and an average was calculated for each
observation block. The totals were also calculated for each observation block in order
to provide alternative methods of presenting the same data. A two tailed F-test was
used in order to establish the degree of variance between observation block one and
two. In order to allow the statistical findings to be viable overlapping needed to be
removed. Therefore no two news reports could have observation blocks over lapping.
This meant that when more than one news report overlapped another there had to be a
selection process in place. It was decided that the news report with the lowest F-test
result would be chosen. Therefore the news report with the greatest difference in
variance between observation block one and two was selected. After removing
overlapping from the entire sample there were 73 news reports remaining that could
be analysed. This is a very similar selection process as that of Dolde, Saad and
Tirtiroglu (2002).

Extreme Events of Volatility

Once the grouping of news report data had been achieved it was necessary to analyse
the data without looking at news reports. Therefore gaining a better understanding of
how extreme volatility events behave. Looking at the changes in variance and return
with the use of observation blocks once more. However each trading day was treated
as an event day and therefore 3064 F-test scores were obtained. The events that had a
return variance that fell into the critical values of a two-tailed F-test were selected.

45 First insert data, Then press Genr, Then type the command “r_ftse100 = dlog(ftse100)”
46 This is the same time horizon as MacKinley (1997).

51
Once again overlapping was removed by selected the event with the most extreme
value. Thus obtaining the event with the most extreme change in variance. In total
there were 32 events that fell below the 1% critical level and they were selected to
analyse and compare with the findings of the news report data. The time frame
selected was from February 3, 1987 until December 29, 1998. It would have possible
to collect more volatile events by fattening the tails, although there was enough data
to gain a comparative understanding of volatile events.

52
CHAPTER 6 - EMPIRICAL ANALYSIS

Extreme Volatility Events

In order to gain a better understanding of volatility events, within the data set, a two-
tailed F test was used. This allowed the variance between two observation blocks of
21 trading days to be measured. The events that fell into the 1% critical region were
selected. When removing events that overlapped it was still possible to have the
maximum volatility level occurring on the event day on the most part 47. In total there
were 32 extreme volatility events, 18 increased in volatility 48 after the event day while
14 decreased 49. Events with extreme increases in volatility averaged a variance ratio
of 0.11 whereas events with extreme decreases in volatility averaged a greater
variance ratio of 0.17. Therefore implying that decreases in volatility change at a
higher level.

Figure 1: Events with Extreme Volatility Increases

0.1600
Average Variance of Block 1 Average Variance of Block 2 Event day Variance

0.1400

0.1200

0.1000
Variance

0.0800

0.0600

0.0400

0.0200

0.0000
5/20/1987

9/18/1987

8/12/1988

2/03/1989

4/18/1990

7/09/1990

9/11/1990

12/25/1990

6/11/1991

8/13/1991

8/09/1993

12/30/1993

1/25/1995

9/06/1996

12/05/1996

3/12/1997

6/30/1997

10/28/1997

Event Date

47 Appendix: Figure 1 and 2

48 Appendix: Table 1
49 Appendix: Table 2

53
 Figure 2: Events with Extreme Volatility Decreases

0.1600
Average Variance of Block 1 Average Variance of Block 2 Event day Variance

0.1400

0.1200

0.1000
Variance

0.0800

0.0600

0.0400

0.0200

0.0000
5/20/1987

9/18/1987

8/12/1988

2/03/1989

4/18/1990

7/09/1990

9/11/1990

12/25/1990

6/11/1991

8/13/1991

8/09/1993

12/30/1993

1/25/1995

9/06/1996

12/05/1996

3/12/1997

6/30/1997

10/28/1997
Event Date

When comparing returns before and after events with extreme decreases in volatility
there was an average decrease of 32% in total return. Three events increased in total
return after the event day compared to 11 events that decreased 50.

Figure 3: Daily Returns Before and After Events with Extreme Volatility
Decreases

0.015

0.01

0.005
Daily Return

-0.005

-0.01

-0.015
Day Return Average Return of Block 1 Average Return of Block 2

-0.02
11/17/1987

1/12/1988

3/15/1988

7/13/1989

3/01/1991

1/15/1992

5/07/1992

10/08/1992

2/22/1993

10/19/1994

4/20/1995

8/03/1995

4/10/1998

9/15/1998

Event Date

50 Appendix: Figure 3 and Table 3

54
When carrying out the same comparison with extreme volatility increases there was
an average decrease of 71% in total return after the event day. Six events increased in
total return while 12 decreased 51.

Figure 4: Daily Returns Before and After Events with Extreme Volatility
Increases
0.015

0.01

0.005
Daily Return

-0.005

-0.01

-0.015 Day Return Average Return of Block 1 Average Return of Block 2

-0.02
5/20/1987

9/18/1987

8/12/1988

2/03/1989

4/18/1990

7/09/1990

9/11/1990

12/25/1990

6/11/1991

8/13/1991

8/09/1993

12/30/1993

1/25/1995

9/06/1996

12/05/1996

3/12/1997

6/30/1997

10/28/1997
Event Date

Although on average there is a negative change in total return after events of extreme
volatility, it appears that extreme increases in volatility experience more extreme
changes in returns and on average a 39% greater downward change in total return.
Events with extreme decreases in volatility experience changes in total return within a
much narrower range than events with extreme increases in volatility. Suggesting that
there is a higher degree of change experienced by events that have extreme increases
in volatility 52.

From the 32 events of extreme volatility 23 decreased in total return while only 9
increased in total return after the event day. On average there was a 196% decrease in
total return, compared to an average of 310% increase in total return. The ranges of

51 Appendix: Figure 4 and Table 3

52 Appendix: Table 3

55
percentage changes for both increased and decreased returns are reasonably similar 53.
When comparing the changes in average daily return before and after the extreme
volatility event day there was a slight difference in results54. From the 22 events that
decreased in daily average return there was an average decrease of 200%. Whereas
the 10 events that increased in average daily return after the extreme volatility event
day experienced on average an increase of 210%. This suggests that the changes in
average daily return change in a similar manner, whether positive or negative,
however when looking at total return the increases are greater than the decreases on
average.

Major News Events

When comparing changes in volatility after each of the 73 major BBC news reports
there were 45 increases and 28 decreases 55. On average increases in volatility
occurred at 19% while decreases in volatility averaged 17%. This can be seen in
Table 5 and 6 below.

Figure 5: Major BBC News Reports that Resulted in an Increase in Volatility

After Release.
0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
18-mar-92
16-jul-87

19-oct-87

10-aug-88

02-nov-88

16-jun-89

22-dec-89

12-jul-90

12-jan-91

14-jun-91

30-oct-91

16-sep-92

14-sep-93

31-aug-94

03-oct-95

27-sep-96

06-aug-97

10-apr-98

17-aug-98

15-nov-98
12-feb-94

15-feb-96

22-feb-97

Date of News Report

53 Appendix: Table 4
54 Appendix: Table 5
55 Appendix: Table 6

56
Figure 6: Variance Before and After Major BBC News Reports that Resulted in
a Decrease in Volatility

0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
24-mar-89

14-may-91
19-aug-87

02-dec-88

22-oct-90

21-jan-92

11-dec-94

15-jun-96
01-jul-94

11-jul-95
15-apr-88

06-apr-97
11-feb-90

03-feb-98
Date of News Report

When looking at the average daily return before and after each news reports there
were no outstanding trends 56. However, whilst analysing the figures in more detail
there were a number of interesting findings. From the 73 news events 31 experienced
an increase in average daily return after the event day. Averaging a percentage
change of 366% between block 1 and block 2. There were 42 news events that
experienced a decrease in average daily return after the event day. Averaging a
negative change of 315% between block 1 and block 2 57.

One news event, which had a large increase in volatility after release, was news report
10 which concerned the Wall Street crash 58. It also experienced a large decrease in
average return 59. From the 45 news events that increased in variance, 18 had a
positive change in return and 27 had a negative change in return. On average there
was a negative change of 153% in average daily return between block 1 and block 2.
This trend is shown clearly in news report 157, February 5th 1996, which refers to the
publication of the arms-to-Iraq report. Volatility increased by 21% and the average
daily return decreased a vast amount. These findings match the findings of Dolde,
Saad and Tirtiroglu (2002). Where they found that an average variance increase of

56 Appendix: Figure 11
57 Appendix: Table 7
58 Appendix: Figure 12
59 Appendix: Figure 13

57
10% could be associated to a further 6.3% reduction in stock prices. When stock
prices decline there is a reaction from investors causing an increase in volatility. This
is explained by Black (1986) who states that extreme declines in return cause the
firm’s market value to decline; thereby increasing the risk of gaining expected
earnings and causing investors to change their current position. However Dolde, Saad
and Tirtiroglu (2002) were unable to find any conclusive trends for volatility
decreases. The stock price sensitivity appears to be far more sensitive to extreme
volatility increases than the findings of Haugen, Talmor and Torous (1991).

When isolating the news events that decreased in volatility after release there was a
group of 28 events. From the 28 news events that decreased in variance, 13
experienced a positive change in average daily return while 15 experienced a
decrease. On average the change in average daily return was 179%. One abnormal
case is news report 147 regarding the Israeli Prime Minister being shot experienced a
15% drop in variance while the daily average daily rose greatly 60. Another finding
was that major BBC news reports that experienced an increase in average daily return
on average increased by 2%. Of the 31 news reports, 18 increased in volatility while
13 decreased 61. These figures are shown in Figure 7 below.

Figure 7: Major BBC News Reports that Resulted an Increase in Daily Return
0.008

0.006

0.004

0.002
Daily Return

-0.002

-0.004

-0.006
Average Return Block 1 Average Return Block 2
-0.008

-0.01

-0.012
18-nov-87

07-nov-89

04-nov-95

23-nov-96
16-sep-92
25-jul-93
14-sep-93
01-jul-94
26-oct-94

03-oct-95
19-aug-87

03-feb-88
15-apr-88
02-dec-88
08-jan-89
16-jun-89

24-apr-90
12-aug-90
12-jan-91
14-may-91
05-dec-91

06-jul-92

11-dec-94
19-apr-95

27-jul-96
27-sep-96

06-apr-97
28-may-98
17-aug-98
22-sep-98
18-mar-92

Date of News Report

60 Appendix: Table 9
61 Appendix: Table 10

58
Alternatively from the 42 news reports that experienced a decrease in average daily
return, 28 increased in volatility while 14 decreased, on average volatility increased
by 8% 62. These findings are shown in Figure 6 below. Papa (2004) found from
empirical research that high levels of volatility occur when the market is in decline,
showing that the markets are not as efficient as assumed by traditional finance.

Figure 8: Major BBC News Reports that Resulted a Decrease in Daily Return
0.01

0.005

0
Daily Return

-0.005

-0.01 Average Return Block 1 Average Return Block 2

-0.015

-0.02
02-nov-88
16-jul-87

19-oct-87

10-aug-88

22-dec-89

07-jul-90

22-oct-90

31-jul-91
28-feb-91

30-oct-91

11-jul-95

19-may-97

06-aug-97

07-jul-98
15may93

12-feb-94

31-aug-94

15-feb-96

15-jun-96

03-feb-98
24-mar-89

Date of News Report

From the 73 major news reports analysed, 17 fell below the 5% critical range of an F-
test. Therefore 12.41% of major BBC news reports experienced an extreme increase
or decrease in volatility after release. This is somewhat similar to the findings of
Haugen, Talmor and Torous (1991). They found that 13.7% of all volatility increases
and 9.1% of all volatile decreases were linked with extraordinary news reports.
Alternatively Dolde, Saad and Tirtiroglu (2002) claim that 63.5% of extreme
volatility increases and 53.4% of volatility decreases are associated with extraordinary
news reports. Although the time frame used by Haugen, Talmor and Torous (1991)
was far more extensive than that of Dolde, Saad and Tirtiroglu (2002). It is apparent
that the method used for selecting news reports also has a significant impact. When
selecting major news reports before analysing the data it is less biased and therefore a
lesser percentage of extreme volatility events are associated with major news items.

62 Appendix: Table 11 – Illustrated by Figure 19

59
Table 1: News Headlines that fell into the 5% tail of an F test

News Report Event Date Headline

10 19-oct-87 Shares plunge after Wall Street crash
11 18-nov-87 King's Cross station fire 'kills 27'
Bangladesh cyclone 'worst for 20 years'.
22 02-dec-88 Pan Am plane explodes over Lockerbie.
26 08-jan-89 Dozens die as plane crashes on motorway
37 22-sep-89 Ten dead in Kent barracks bomb
40 07-nov-89 Protests force out East German rulers
56 24-apr-90 Hubble telescope takes off for space
65 22-oct-90 Aral Sea is 'world's worst disaster'
86 31-jul-91 Superpowers to cut nuclear warheads
87 30-aug-91 U.S Suspends assistance to Haiti
94 18-mar-92 South Africa votes for change
97 16-sep-92 UK crashes out of ERM
142 11-jul-95 Serbs overrun UN 'safe haven'
162 27-jul-96 Bomb rocks Atlanta Olympics
167 06-apr-97 Fault cuts short space shuttle mission
Military jet causes cable car tragedy.
186 03-feb-98 Iraq reported to agree to lift arms inspection ban.
193 17-aug-98 Clinton admits Lewinsky affair

60
CHAPTER 7 – SHORTCOMINGS AND SUGGESTIONS FOR
FUTURE RESEARCH

Shortcomings

Although it is clear that the news reports used in this paper are of great significance it
is difficult to label them as every major news report within a 12 year time frame. This
is a similar problem to that of Haugen, Talmor and Torous (1991) as they did not
indicate their selection process for selecting extraordinary news items. Whereas
Dolde, Saad and Tirtiroglu (2002) appear to have selected the news that occurred on
the dates where extreme volatility was found. By selecting the BBC’s selection of
major news reports it appears that bias has been minimised, as the selection provided
has not been chosen with the financial markets in mind

When locating the time of release for each news report it was difficult to accurately
record when investors received the information. Therefore the day of release was the
last day in the first observation block. However if the minute by minute index price
had been available it could have enabled a more accurate measurement to have been
made. However there would still be the problem of knowing when observation block
1 ends and 2 begins. Therefore for the purposes of this project it was most practical to
use the end of day index price and begin the second observation block the following
day after the news release. On a number of occasions the news report was released on
a Saturday or Sunday. This problem was resolved by using the Friday Index Price
(previous trading day) as the last observation of block 1. With block 2 beginning on
the Monday (following trading day). A number of interesting but primitive findings
showed the event day volatility compared to the average of observation blocks 1 and
2 63.

Due to new news being released at all moments throughout each day there is the
obvious difficulty of pinpointing an effect solely due to a single news event.
Although with this in mind it was most appropriate to select major news headlines

63 Appendix: Table 9, Figure 5 and 6

61
that reached the BBC’s collection of major news headlines. Therefore increasing the
probability that if a single news report made an impact the chosen headlines were
most likely to be a significant variable. Unlike Dolde, Saad and Tirtiroglu (2002) the
news was selected before carrying out an F-test on the Index Prices. This removed
the bias of matching each significant statistic to a news report at that moment.
Otherwise it would be possible to find a news report that matches each significant
variance ratio. It was decided to include the Wall Street crash in the time frame of the
data in order to carry out a similar research as that of Dolde, Saad and Tirtiroglu
(2002). This allowed a more accurate comparison to be made with their findings.
However without such a drastic shift in volatility and return there could have been
significantly different findings. Additionally in the future a similar research could be
carried out using a number of different stock exchanges, giving a more dynamic
result.

Further Research

Identifying different types of news and the different effects they may have on stock
prices would be a particularly interesting field of research to pursue 64. Although this
would require a much greater time span of data in order to obtain enough news
reports. Dolde, Saad and Tirtiroglu (2002) found that there was a positive correlation
between extraordinary news reports and volatility in the financial and industrial
sectors of the S&P 500. Alternatively in the utilities and transportation sectors there
were signs of an apparent negative correlation. This supports the potential for future
research to be carried out upon the impact of sector specific news.

Additionally further research could be carried out to investigate the response time
taken by the market to adapt to new information 65. However this once again faces the
problem of pinpointing an exact moment of news release. Requiring research to be
carried out finding out who was the first reporter of each news report obtaining the
exact time of news release. Dolde, Saad and Tirtiroglu (2002) write about how future

64 Appendix: Table 12 – Changes in Volatility and Returns After BBC News Reports regarding War
Appendix: Table 13 – Changes in Volatility and Returns After BBC News Reports regarding
Politics/Religion
65 Appendix: Figure 20 – Illustration of a potential research topic

62
research could help improve to the current understanding of how the modern day
communication and dissemination process has changed the response time of investors.
With improved efficiency and sophistication for investors and managers to
communicate with strategically, is there less irrational behaviour or more speculation
in the modern financial markets? It is debateable as to the extent of which managers
manipulate investors with use of using feedback to create volatility. Antweiler and
Frank (2006) discuss how researchers have not placed importance upon testing
investor psychology and market microstructure within the way stock prices change
and mean revert. If behavioural finance is to be used in order to explain irrational
changes in stock prices research needs to be given to the effects news has upon stock
prices in the long-term.

63
CONCLUSION

The manner in which news is disclosed influences the behaviour of investors in

different ways. Traders that use noise as pure truth, create a belief that encourages
trading although in reality halting from trading would be more profitable, according to
Black (1986). Investors are more likely to make biased decisions when valuing
securities when there is a lack of available information according to Hirshleifer (2001)
who also states that pure noise traders cause stock prices to become overvalued as
they overreact to positive feedback. Boswijk, Hommes and Manzan (2003) found that
investors frequently used speculative information instead of primary news when
selecting stocks to buy. While Miller (1977) stated that whether the investor was
optimistic or pessimistic played an important role in the amount of speculative
information used when selling stocks. Yermack (1997), Aboody and Kasznik (2000)
write about how managers can decide to conceal positive news or disclose negative
news in a timely fashion in order to benefit from the lower of stock prices with the use
of options held, at the cost of external investors. Having a difference of interest
between management and investors hinders the stock price from increasing to its full
potential according to Boot and Thakor (2002). Whereas Massa and Simonov (2005)
focus on the social interaction investors have had throughout their lives and discover
that their stock picking is influenced. Although Anilowski, Feng and Skinner (2005)
claim that managers consistently withhold negative information from investors,
Verrecchia (2001) argues that if they did not withhold harming information there
would be a loss of strategic advantage over competitors. Jensen (2004) explains how
analysts have almost become media stars that many investors follow blindly. This has
given them the power to manipulate the behaviour of investors and as Orcutt (2004)
states, it is important that investors understand that analysts may not be sharing their
true belief as it may not profit them as much as alternative strategies. Kindleberger
(1978), as well as De Grauwe and Grimaldi (2004) mention how investors can be
swayed towards a trend strategy from a fundamental view when stocks persistently
perform well. As the stock price continues to rise, investors believe that it will
continue without considering the earning capacity. Although there are many
researchers arguing the irrational investor view, Fama, Fish, Jensen and Roll (1969)
claim that empirical evidence shows that the stock prices change efficiently to new

64
information. Alternatively Coval, Hirshleifer and Shumway (2005) found numerous
investors that consistently outperformed the market without the use of inside
information.

When analysing the impact major BBC news reports had upon the stock price
volatility and returns within the FTSE 100, there were similar findings to that of
Haugen, Talmor and Torous (1991). With 12.4% of major news events experiencing
an extreme increase or decrease in stock price volatility. From 73 news reports, 45
increased and 28 decreased in stock price volatility after the release date. While 31
news reports had increased in daily return after the event day. From the 45 news
events that increased in volatility, 27 experienced a negative change in returns. While
the 28 events that experienced a decrease in volatility had a similar amount of
increases and decreases in average daily return. News reports that experienced an
increase in average daily return had an average increase in volatility of 2%, compared
to 8% for negative changes in average daily return. It appears that when selecting the
news before analysing the stock prices there are a lower number of major news
reports associated with extreme changes in volatility.

65
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APPENDIX

79
 APPENDIX TABLE OF CONTENTS
Table 1: Events with Extreme Volatility Increases

Figure 1: Events with Extreme Volatility Increases

Table 2: Events with Extreme Volatility Decreases

Figure 2: Events with Extreme Volatility Decreases

Figure 3: Daily Returns Before and After Events with Extreme Volatility Decreases

Figure 4: Daily Returns Before and After Events with Extreme Volatility Increases

Table 3: Total Return Before and After Extreme Volatility Events

Figure 5: Extreme Volatility Events with Decreased Average Daily Returns

Figure 6: Extreme Volatility Events with Increased Returns

Figure 7: Comparison of Total Decreased Returns Before and After Extreme

Volatility Events

Figure 8: Comparison of Total Increased Returns Before and After Extreme Volatility
Events

Table 4. Total Returns Before and After Extreme Volatility Events (Figure 7 & 8
data)

Figure 9: Comparison of the Daily Returns Before and After the Extreme Volatility
Event Day

Table 5: Average Daily Return Before, After and On Extreme Volatility Event Day
(Figure 9 data)

Figure 10: Comparison of the Variance Before and After the Release of Major BBC
News Reports (non-overlapping)

Table 6: Comparison of Volatility Increases and Decreases after Major BBC News
Reports. No overlapping has occurred and data has been used in Figure 11.

Figure 11: Comparison of the Average Return Before and After the Release of Major
BBC News Reports (non-overlapping)

Table 7: Average Daily Return Before and After the Release of Major BBC News
Reports (increases and decreases)

Figure 12: Major BBC News Reports that Resulted in an Increase in Volatility After
Release (non-overlapping)

80
Figure 13: Returns of Major BBC News Reports that Resulted in an Increase in
Volatility (non-overlapping)

Table 8: Comparison of the percentage change in return after Major BBC News
Reports that had an increase in Volatility.

Figure 14: Variance Before and After Major BBC News Reports that Resulted in a
Decrease in Volatility (non-overlapping)

Figure 15: Returns Before and After Major BBC News Reports that Resulted in a
Decrease in Volatility (non-overlapping)

Table 9: Changes in Volatility and Return after Major BBC News Reports

Figure 16: Variance Before and After Major BBC News Reports that Resulted in a
Decrease in Daily Return (non-overlapping)

Figure 17: Variance Before and After Major BBC News Reports that Resulted in an
Increase in Daily Return (non-overlapping)

Table 10: Changes in Volatility for Major BBC News Reports that experienced an
increase in average daily return

Figure 18: Major BBC News Reports that Resulted an Increase in Daily Return (non-
overlapping)

Table 11: The Percentage Change in Variance of Major BBC News Reports that
Resulted in a Decrease in Return After Release.

Figure 19: Major BBC News Reports that Resulted a Decrease in Daily Return (non-
overlapping)

Figure 20: Variance Before and After Major BBC News Report Day compared with
the Maximum and Minimum Variance throughout the 1st and 2nd observation blocks
(non-overlapping)

Table 12: Changes in Volatility and Returns after BBC News Reports regarding Wars

Table 13: Changes in Volatility and Returns after BBC News Reports regarding
Politics and Religion

Table 14: Headlines of all 198 Major BBC News Reports. The yellow symbolises the
news reports selected for non-overlapping.

81
 Table 1: Events with Extreme Volatility Increases

This table shows the extreme volatility events whereby the average variance increased after the event day. The data used was collected from the
FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance between the
second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days.
Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on
the last day of the first observation block. The maximum and minimum variance has been measured from the 42 trading days for each event.

Date Variance of Block 1 Variance of Block 2 Event day Variance Max Variance Min Variance
5/20/1987 0.0837 0.0859 0.1418 0.1418 0.0267
9/18/1987 0.0623 0.0816 0.1205 0.2849 0.0131
8/12/1988 0.0616 0.0750 0.1013 0.1267 0.0205
2/03/1989 0.0677 0.0752 0.1036 0.1363 0.0132
4/18/1990 0.0698 0.0842 0.1199 0.1305 0.0000
7/09/1990 0.0652 0.0706 0.1091 0.1256 0.0098
9/11/1990 0.0918 0.1018 0.1224 0.2020 0.0120
12/25/1990 0.0716 0.0734 0.1095 0.1498 0.0000
6/11/1991 0.0711 0.0829 0.0981 0.1391 0.0148
8/13/1991 0.0637 0.0703 0.1005 0.1612 0.0287
8/09/1993 0.0544 0.0601 0.0867 0.1146 0.0064
12/30/1993 0.0626 0.0695 0.1305 0.1305 0.0000
1/25/1995 0.0628 0.0662 0.1150 0.1150 0.0048
9/06/1996 0.0559 0.0631 0.0920 0.0920 0.0059
12/05/1996 0.0667 0.0702 0.1145 0.1555 0.0000
3/12/1997 0.0580 0.0685 0.0920 0.1265 0.0000
6/30/1997 0.0670 0.0715 0.1007 0.1556 0.0050
10/28/1997 0.0878 0.1013 0.1375 0.1723 0.0125

AVERAGE 0.0680 0.0762 0.1109 0.1478 0.0096

82
 Figure 1: Events with Extreme Volatility Increases

This graph shows the extreme volatility events whereby the average variance increased after the event day. The data used was collected from the
FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance between the
second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days.
Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on
the last day of the first observation block.

0.1600
Average Variance of Block 1 Average Variance of Block 2 Event day Variance

0.1400

0.1200

0.1000
Variance

0.0800

0.0600

0.0400

0.0200

0.0000
5/20/1987

9/18/1987

8/12/1988

2/03/1989

4/18/1990

7/09/1990

9/11/1990

12/25/1990

6/11/1991

8/13/1991

8/09/1993

12/30/1993

1/25/1995

9/06/1996

12/05/1996

3/12/1997

6/30/1997

10/28/1997
Date
83
 Table 2: Events with Extreme Volatility Decreases

This table shows the extreme volatility events whereby the average variance decreased after the event day. The data used was collected from the
FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance between the
second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days.
Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on
the last day of the first observation block. The maximum and minimum variance has been measured from the 42 trading days for each event.

Date Variance of Block 1 Variance of Block 2 Event day Variance Max Variance Min Variance
11/17/1987 0.1673 0.0975 0.3819 0.3819 0.0305
1/12/1988 0.0878 0.0835 0.1907 0.1907 0.0000
3/15/1988 0.0829 0.0774 0.1281 0.1347 0.0000
7/13/1989 0.0703 0.0668 0.1261 0.1261 0.0110
3/01/1991 0.0893 0.0783 0.1338 0.1398 0.0000
1/15/1992 0.0751 0.0655 0.1451 0.1451 0.0000
5/07/1992 0.0771 0.0674 0.1828 0.1828 0.0000
10/08/1992 0.1098 0.0754 0.2033 0.2033 0.0151
2/22/1993 0.0812 0.0794 0.1359 0.1359 0.0316
10/19/1994 0.0886 0.0812 0.1370 0.1370 0.0117
4/20/1995 0.0629 0.0501 0.1271 0.1271 0.0000
8/03/1995 0.0709 0.0595 0.1304 0.1304 0.0126
4/10/1998 0.0736 0.0666 0.1270 0.1661 0.0000
9/15/1998 0.1287 0.1142 0.1844 0.2142 0.0205

AVERAGE 0.0904 0.0759 0.1667 0.1725 0.0095

84
 Figure 2: Events with Extreme Volatility Decreases

This graph shows the extreme volatility events whereby the average variance decreased after the event day. The data used was collected from
the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance between the
second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days.
Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on
the last day of the first observation block.

0.4500

0.4000
Average Variance of Block 1 Average Variance of Block 2 Event day Variance

0.3500

0.3000

0.2500
Variance

0.2000

0.1500

0.1000

0.0500

0.0000
11/17/1987

1/12/1988

3/15/1988

7/13/1989

3/01/1991

1/15/1992

5/07/1992

10/08/1992

2/22/1993

10/19/1994

4/20/1995

8/03/1995

4/10/1998

9/15/1998
Date
85
 Figure 3: Returns Before and After Events with Extreme Volatility Decreases

This graph shows the average return before and after extreme volatility events with volatility decreases after the event day. The data used was
collected from the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the
variance between the second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists
of 21 trading days. Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The
event day occurs on the last day of the first observation block.
0.015

0.01

0.005
Daily Return

-0.005

-0.01

-0.015
Day Return Average Return of Block 1 Average Return of Block 2

-0.02
11/17/1987

1/12/1988

3/15/1988

7/13/1989

3/01/1991

1/15/1992

5/07/1992

10/08/1992

2/22/1993

10/19/1994

4/20/1995

8/03/1995

4/10/1998

9/15/1998
86

Date
 Figure 4: Returns Before and After Events with Extreme Volatility Increases

This graph shows the average daily return before and after extreme volatility events with volatility increases after the event day. The data used
was collected from the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the
variance between the second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists
of 21 trading days. Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The
event day occurs on the last day of the first observation block.
0.015

0.01

0.005
Daily Return

-0.005

-0.01

-0.015

Day Return Average Return of Block 1 Average Return of Block 2

-0.02
12/25/1990

12/30/1993

12/05/1996

10/28/1997
5/20/1987

9/18/1987

8/12/1988

2/03/1989

4/18/1990

7/09/1990

9/11/1990

6/11/1991

8/13/1991

8/09/1993

1/25/1995

9/06/1996

3/12/1997

6/30/1997
Date

87
 Table 3: Total Return Before and After Extreme Volatility Events
This table shows the total return before and after each extreme volatility event occurring within the FTSE 100 Index Price between April 22,
1987 and June 18, 1997. An extreme volatility event was identified when the variance between the second and first observation blocks fell into
the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days. Should more than one extreme volatility event
overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on the last day of the first observation block.

Decreases in Volatility (14) Increases in Volatility (18)

Date Block 1 Total Return Block 2 Total Return % Change Date Block 1 Total Return Block 2 Total Return % Change
11/17/1987 -0.212 0.018 108% 5/20/1987 0.114 0.053 -53%
1/12/1988 0.051 -0.012 -123% 9/18/1987 0.063 -0.126 -299%
3/15/1988 0.056 -0.016 -129% 8/12/1988 -0.011 -0.055 -413%
7/13/1989 0.057 0.042 -26% 2/03/1989 0.140 0.001 -99%
3/01/1991 0.095 0.029 -70% 4/18/1990 -0.024 0.035 245%
1/15/1992 0.042 -0.006 -114% 7/09/1990 -0.012 -0.051 -316%
5/07/1992 0.121 -0.012 -110% 9/11/1990 -0.034 -0.011 69%
10/08/1992 0.087 0.063 -28% 12/25/1990 0.002 -0.036 -1852%
2/22/1993 0.020 0.008 -61% 6/11/1991 0.022 -0.014 -161%
10/19/1994 0.008 0.022 180% 8/13/1991 0.020 0.016 -22%
4/20/1995 0.011 0.027 142% 8/09/1993 0.049 0.017 -65%
8/03/1995 0.023 0.010 -59% 12/30/1993 0.059 0.005 -91%
4/10/1998 0.052 -0.013 -124% 1/25/1995 -0.033 0.022 167%
9/15/1998 -0.035 -0.047 -37% 9/06/1996 0.021 0.035 65%
12/05/1996 0.029 0.009 -67%
3/12/1997 0.027 -0.025 -192%
6/30/1997 -0.004 0.057 1685%
10/28/1997 -0.093 0.028 130%
Average -32% Average -71%
High -129% High 1685%
Low 180% Low -1852%
Positive 3 Positive 6
Negative 11 Negative 12

88
 Figure 5: Extreme Volatility Events with Decreased Average Daily Returns

This graph shows the extreme volatility events whereby the average daily return decreased after the event day. The data used was collected from
the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance between the
second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days.
Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on
the last day of the first observation block
0.015

0.01

0.005
Daily Return

-0.005

-0.01

-0.015
Day Return Average Return of Block 1 Average Return of Block 2

-0.02
5/20/1987

9/18/1987

1/12/1988

3/15/1988

8/12/1988

2/03/1989

7/13/1989

7/09/1990

12/25/1990

3/01/1991

6/11/1991

8/13/1991

1/15/1992

5/07/1992

10/08/1992

2/22/1993

8/09/1993

12/30/1993

8/03/1995

12/05/1996

3/12/1997

4/10/1998

9/15/1998
Date

89
 Figure 6: Extreme Volatility Events with Increased Returns

This graph shows the extreme volatility events whereby the average daily return increased after the event day. The data used was collected from
the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance between the
second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21 trading days.
Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event day occurs on
the last day of the first observation block.
0.01

0.005

0
Daily Return

-0.005

-0.01

-0.015 Day Return Average Return of Block 1 Average Return of Block 2

-0.02
11/17/1987 10/19/1994 4/20/1995 4/18/1990 9/11/1990 1/25/1995 9/06/1996 6/30/1997 10/28/1997
Date

90
 Figure 7: Comparison of Total Decreased Returns Before and After Extreme Volatility Events

This graph compares the total return before and after extreme volatility events where the total return is less in the second observation block. The
data used was collected from the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified
when the variance between the second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block
consists of 21 trading days. Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping.
The event day occurs on the last day of the first observation block.
0.2

Total Return of Block 1 Total Return of Block 2

0.15

0.1

0.05
Return

-0.05

-0.1

-0.15
5/20/1987

9/18/1987

1/12/1988

3/15/1988

8/12/1988

2/03/1989

7/13/1989

7/09/1990

12/25/1990

3/01/1991

6/11/1991

8/13/1991

1/15/1992

5/07/1992

10/08/1992

2/22/1993

8/09/1993

12/30/1993

8/03/1995

12/05/1996

3/12/1997

4/10/1998

9/15/1998
Date
91
 Figure 8: Comparison of Total Increased Returns Before and After Extreme Volatility Events

This graph compares the total return before and after extreme volatility events where the total return is greater in the second observation block.
The data used was collected from the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was
identified when the variance between the second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each
observation block consists of 21 trading days. Should more than one extreme volatility event overlap the most volatile event is selected so as to
avoid overlapping. The event day occurs on the last day of the first observation block.
0.1

0.05

-0.05
Return

-0.1

Total Return of Block 1 Total Return of Block 2

-0.15

-0.2

-0.25
11/17/1987 10/19/1994 4/20/1995 4/18/1990 9/11/1990 1/25/1995 9/06/1996 6/30/1997 10/28/1997
Date

92
 Table 4. Total Returns Before and After Extreme Volatility Events (Data used in Figure 7 & 8 data)

Decreases in Return (23) Increases in Return (9)

Date Block 1 Total Return Block 2 Total Return % Change Date Block 1 Total Return Block 2 Total Return % Change
5/20/1987 0.114 0.053 -53% 11/17/1987 -0.212 0.018 108%
9/18/1987 0.063 -0.126 -299% 10/19/1994 0.008 0.022 180%
1/12/1988 0.051 -0.012 -123% 4/20/1995 0.011 0.027 142%
3/15/1988 0.056 -0.016 -129% 4/18/1990 -0.024 0.035 245%
8/12/1988 -0.011 -0.055 -413% 9/11/1990 -0.034 -0.011 69%
2/03/1989 0.140 0.001 -99% 1/25/1995 -0.033 0.022 167%
7/13/1989 0.057 0.042 -26% 9/06/1996 0.021 0.035 65%
7/09/1990 -0.012 -0.051 -316% 6/30/1997 -0.004 0.057 1685%
12/25/1990 0.002 -0.036 -1852% 10/28/1997 -0.093 0.028 130%
3/01/1991 0.095 0.029 -70%
6/11/1991 0.022 -0.014 -161%
8/13/1991 0.020 0.016 -22%
1/15/1992 0.042 -0.006 -114%
5/07/1992 0.121 -0.012 -110%
10/08/1992 0.087 0.063 -28%
2/22/1993 0.020 0.008 -61%
8/09/1993 0.049 0.017 -65%
12/30/1993 0.059 0.005 -91%
8/03/1995 0.023 0.010 -59%
12/05/1996 0.029 0.009 -67%
3/12/1997 0.027 -0.025 -192%
4/10/1998 0.052 -0.013 -124%
9/15/1998 -0.035 -0.047 -37%
Average -196% Average 310%
High -1852% High 1685%
Low -22% Low 65%
Positive 0 Positive 9
Negative 23 Negative 0

93
 Figure 9: Comparison of the Daily Returns Before and After the Extreme Volatility Event Day

This graph shows the average daily return before, after and on the event day for all 32 Extreme Volatility Events. The data used was collected
from the FTSE 100 Index Price between April 22, 1987 and June 18, 1997. An extreme volatility event was identified when the variance
between the second and first observation blocks fell into the 1% critical region on a two-tailed F test. Each observation block consists of 21
trading days. Should more than one extreme volatility event overlap the most volatile event is selected so as to avoid overlapping. The event
day occurs on the last day of the first observation block.
0.015

0.01

0.005

0
Return

-0.005

-0.01

-0.015
Day Return Average Return of Block 1 Average Return of Block 2

-0.02
5/20/1987
9/18/1987

1/12/1988

3/15/1988
8/12/1988

2/03/1989

7/13/1989
4/18/1990

7/09/1990
9/11/1990

12/25/1990

3/01/1991
6/11/1991

8/13/1991

1/15/1992
5/07/1992

10/08/1992
2/22/1993

8/09/1993

12/30/1993
10/19/1994

1/25/1995

4/20/1995
8/03/1995

9/06/1996
12/05/1996

3/12/1997

6/30/1997
10/28/1997
11/17/1987

4/10/1998
9/15/1998
94
Date
 Table 5: Average Daily Return Before, After and On Extreme Volatility Event Day (Data used in Figure 9)

Decreases in Return (22) Increases in Return (10)

Block 1 Block 2 Block 1 Block 2
Event Day Average Daily Average Daily % Event Day Average Daily Average Daily
Date Return Return Return Change Date Return Return Return % Change
5/20/1987 -0.01837 0.00542 0.00254 -53% 1/12/1988 -0.01200 0.00243 -0.00057 123%
9/18/1987 0.01027 0.00302 -0.00601 -299% 4/18/1990 -0.00389 -0.00115 0.00167 245%
3/15/1988 0.01115 0.00268 -0.00077 -128% 9/11/1990 -0.00126 -0.00164 -0.00050 69%
8/12/1988 0.00446 -0.00051 -0.00262 -413% 10/19/1994 -0.00797 0.00037 0.00103 180%
2/03/1989 0.01289 0.00667 0.00007 -99% 1/25/1995 0.00444 -0.00159 0.00106 167%
7/13/1989 0.00058 0.00270 0.00199 -26% 4/20/1995 0.00145 0.00053 0.00128 142%
7/09/1990 -0.00107 -0.00059 -0.00257 -337% 9/06/1996 0.00149 0.00101 0.00166 65%
12/25/1990 0.00000 0.00010 -0.00170 -1852% 6/30/1997 -0.00772 -0.00017 0.00273 1685%
3/01/1991 0.00252 0.00453 0.00137 -70% 10/28/1997 -0.01778 -0.00444 0.00134 130%
6/11/1991 0.01215 0.00106 -0.00064 -161% 11/17/1987 -0.01471 -0.01010 0.00084 108%
8/13/1991 0.00601 0.00098 0.00076 -22%
1/15/1992 0.00823 0.00200 -0.00027 -114%
5/07/1992 0.00119 0.00578 -0.00059 -110%
10/08/1992 0.00858 0.00414 0.00298 -28%
2/22/1993 -0.00060 0.00097 0.00038 -60%
8/09/1993 0.00557 0.00234 0.00083 -65%
12/30/1993 -0.00964 0.00280 0.00026 -91%
8/03/1995 -0.00697 0.00112 0.00046 -59%
12/05/1996 0.00148 0.00138 0.00045 -67%
3/12/1997 -0.00492 0.00129 -0.00119 -192%
4/10/1998 0.00000 0.00249 -0.00061 -124%
9/15/1998 0.00248 -0.00164 -0.00225 -37%

Average -22% Average 291%

High -200% High 1685%
Low -1852% Low 65%

95
 Figure 10: Comparison of the Variance Before and After the Release of Major BBC News Reports (non-overlapping)

This graph shows all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999. Major News Reports that
overlapped were selected on the basis of a two-tailed F test. The news report with the greatest difference in variance between observation block
one and two was selected. Major BBC news reports have been identified as those that reached the history archives on the BBC news website.
The data used was collected from the FTSE 100 Index Price between May 14, 1987 and December 23, 1998. Observation block one consists of
20 trading days plus the day of the major news report, while the second observation block consists of the following 20 trading days. See Table 6
for actual data.
0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
18-nov-87

02-nov-88

04-nov-95

15-nov-98
15-apr-88
10-aug-88

24-apr-90
16-jul-87

08-jan-89

22-dec-89

12-jul-90
22-oct-90
12-jan-91
14-may-91

15may93
31-jul-91
30-oct-91
21-jan-92
06-jul-92

12-feb-94
01-jul-94
26-oct-94
17-jan-95
11-jul-95

15-feb-96
15-jun-96

22-feb-97
19-may-97
06-aug-97
03-feb-98
28-may-98
17-aug-98
24-mar-89
18-sep-87

22-sep-89

14-sep-93

27-sep-96
Date of News Report
96
 Table 6: Comparison of Volatility Increases and Decreases after Major BBC
News Reports (No overlapping has occurred and data has been used in Figure 11)

Increases in Volatility (45) Decreases in Volatility (28)

News Difference % Change News Difference % Change
Report Date Variance Variance Report Date Variance Variance
3 16-jul-87 0.018 20.70% 5 19-aug-87 -0.020 -19.38%
7 18-sep-87 0.009 10.99% 11 18-nov-87 -0.095 -43.87%
10 19-oct-87 0.134 150.69% 15 15-apr-88 -0.015 -14.72%
13 03-feb-88 0.002 1.83% 16 03-jul-88 -0.006 -7.36%
18 10-aug-88 0.018 24.79% 22 02-dec-88 -0.023 -25.17%
19 29-sep-88 0.003 4.27% 28 15-feb-89 -0.016 -15.82%
21 02-nov-88 0.015 20.52% 29 24-mar-89 -0.009 -9.65%
26 08-jan-89 0.019 28.99% 40 07-nov-89 -0.032 -27.09%
33 16-jun-89 0.009 11.51% 52 11-feb-90 -0.004 -4.29%
37 22-sep-89 0.024 29.95% 58 07-jul-90 -0.018 -17.88%
47 22-dec-89 0.004 4.83% 65 22-oct-90 -0.029 -23.89%
56 24-apr-90 0.023 30.33% 68 27-nov-90 -0.015 -15.93%
60 12-jul-90 0.016 19.27% 77 14-may-91 -0.012 -13.56%
61 12-aug-90 0.003 3.26% 87 30-aug-91 -0.028 -27.23%
71 12-jan-91 0.020 25.53% 92 21-jan-92 -0.017 -18.02%
76 28-feb-91 0.009 10.27% 110 15may93 -0.017 -20.34%
81 14-jun-91 0.013 17.20% 128 01-jul-94 -0.016 -16.30%
86 31-jul-91 0.021 26.77% 134 26-oct-94 -0.009 -8.58%
88 30-oct-91 0.005 5.47% 136 11-dec-94 -0.003 -3.85%
90 05-dec-91 0.017 19.25% 140 19-apr-95 -0.011 -14.25%
94 18-mar-92 0.033 37.76% 142 11-jul-95 -0.024 -25.18%
95 06-jul-92 0.012 13.39% 147 04-nov-95 -0.013 -15.22%
97 16-sep-92 0.027 27.41% 161 15-jun-96 -0.001 -1.27%
114 25-jul-93 0.010 16% 162 27-jul-96 -0.022 -25.42%
118 14-sep-93 0.007 10.81% 167 06-apr-97 -0.018 -20.45%
119 15-dec-93 0.004 4.32% 172 06-jul-97 -0.012 -11.78%
122 12-feb-94 0.010 11.39% 186 03-feb-98 -0.023 -21.64%
127 10-may-94 0.008 9.63% 191 07-jul-98 0.000 -0.01%
132 31-aug-94 0.014 17.71%
138 17-jan-95 0.011 15.40%
146 03-oct-95 0.005 6.18%
153 14-dec-95 0.007 10.51%
157 15-feb-96 0.014 20.80%
160 11-apr-96 0.005 7.76%
163 27-sep-96 0.001 1.33%
165 23-nov-96 0.023 32.65%
166 22-feb-97 0.013 18.72%
170 19-may-97 0.017 23.80%
174 06-aug-97 0.017 18.32%
179 26-sep-97 0.019 20.07%
188 10-apr-98 0.012 14.08%
190 28-may-98 0.010 11.39%
193 17-aug-98 0.037 33.67%
196 22-sep-98 0.014 10.30%
197 15-nov-98 0.002 1.84%

Average 0.016 19.15% Average -0.018 -16.72%

97
 Figure 11: Comparison of the Average Return Before and After the Release of Major BBC News Reports (non-overlapping)

This graph shows the average return before and after all non-overlapping major BBC news reports between June 11, 1987 and November 25,
1999. Major News Reports which overlapped were selected on the basis of a two-tailed F test. The news report with the greatest difference in
variance between observation block one and two was selected. Major BBC news reports have been identified as those that reached the history
archives on the BBC news website. The data used was collected from the FTSE 100 Index Price between May 14, 1987 and December 23,
1998. Observation block one consists of 20 trading days plus the day of the major news report, while the second observation block consists of
the following 20 trading days.
0.01

0.005

0
Daily Return

-0.005

-0.01
Average Return Block 1 Average Return Block 2

-0.015

-0.02
14-may-91

15may93

19-may-97

28-may-98
24-mar-89
16-jul-87
18-sep-87
18-nov-87
15-apr-88
10-aug-88
02-nov-88
08-jan-89

22-sep-89
22-dec-89
24-apr-90
12-jul-90
22-oct-90
12-jan-91

31-jul-91
30-oct-91
21-jan-92
06-jul-92

14-sep-93

01-jul-94
26-oct-94
17-jan-95
11-jul-95
04-nov-95

15-jun-96
27-sep-96

06-aug-97

17-aug-98
15-nov-98
12-feb-94

15-feb-96

22-feb-97

03-feb-98
Date of News Report
98
Table 7: Average Daily Return Before and After the Release of Major BBC News
In order to avoid overlapping events were selected using a two-tailed F test whenever necessary. Major
BBC news reports have been identified as those that reached the history archives on the BBC news
website. The data used was collected from the FTSE 100 Index Price between May 14, 1987 and
December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news
report, while the second observation block consists of the following 20 trading days.

Increased Returns (31) Decreased Returns (42)

News Difference % News Difference %
Report Date Return Change Report Date Return Change
5 19-aug-87 0.00392 142% 3 16-jul-87 -0.00543 -192%
11 18-nov-87 0.00985 93% 7 18-sep-87 -0.00236 -102%
13 03-feb-88 0.00117 450% 10 19-oct-87 -0.01412 -1890%
15 15-apr-88 0.00183 93% 16 03-jul-88 -0.00120 -109%
22 02-dec-88 0.00200 124% 18 10-aug-88 -0.00256 -1043%
26 08-jan-89 0.00521 357% 19 29-sep-88 -0.00141 -58%
33 16-jun-89 0.00494 271% 21 02-nov-88 -0.00261 -290%
40 07-nov-89 0.00453 383% 28 15-feb-89 -0.00255 -61%
56 24-apr-90 0.00579 227% 29 24-mar-89 -0.00088 -90%
61 12-aug-90 0.00046 15% 37 22-sep-89 -0.00385 -1060%
71 12-jan-91 0.00446 303% 47 22-dec-89 -0.00337 -112%
77 14-may-91 0.00175 253% 52 11-feb-90 -0.00092 -84%
90 05-dec-91 0.00376 155% 58 07-jul-90 -0.00525 -112%
94 18-mar-92 0.00372 390% 60 12-jul-90 -0.00145 -155%
95 06-jul-92 0.00155 51% 65 22-oct-90 -0.00239 -94%
97 16-sep-92 0.00758 386% 68 27-nov-90 -0.00287 -97%
114 25-jul-93 0.00509 408% 76 28-feb-91 -0.00199 -48%
118 14-sep-93 0.00226 665% 81 14-jun-91 -0.00161 -125%
128 01-jul-94 0.00399 285% 86 31-jul-91 -0.00256 -83%
134 26-oct-94 0.00108 164% 87 30-aug-91 -0.00145 -197%
136 11-dec-94 0.00188 175% 88 30-oct-91 -0.00017 -9%
140 19-apr-95 0.00060 66% 92 21-jan-92 -0.00322 -94%
146 03-oct-95 0.00030 166% 110 15may93 -0.00025 -55%
147 04-nov-95 0.00213 4083% 119 15-dec-93 -0.00034 -16%
162 27-jul-96 0.00317 847% 122 12-feb-94 -0.00320 -3238%
163 27-sep-96 0.00018 21% 127 10-may-94 -0.00042 -41%
165 23-nov-96 0.00237 262% 132 31-aug-94 -0.00466 -318%
167 06-apr-97 0.00516 206% 138 17-jan-95 -0.00040 -126%
190 28-may-98 0.00043 82% 142 11-jul-95 -0.00147 -88%
193 17-aug-98 0.00490 75% 153 14-dec-95 -0.00084 -113%
196 22-sep-98 0.00901 137% 157 15-feb-96 -0.00076 -1459%
160 11-apr-96 -0.00171 -141%
161 15-jun-96 -0.00004 -9%
166 22-feb-97 -0.00281 -166%
170 19-may-97 -0.00375 -88%
172 06-jul-97 -0.00141 -68%
174 06-aug-97 -0.00199 -93%
179 26-sep-97 -0.00355 -134%
186 03-feb-98 -0.00150 -46%
188 10-apr-98 -0.00393 -137%
191 07-jul-98 -0.00181 -699%
197 15-nov-98 -0.00234 -74%
Average 366% Average -315%
High 4083% High -3238%
Low 15% Low -9%

99
 Figure 12: Major BBC News Reports that Resulted in an Increase in Volatility After Release (non-overlapping)

This graph shows all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999 which experience an increase in
variance after the news is released. Major News Reports which overlapped were selected on the basis of a two-tailed F test. The news report
with the greatest difference in variance between observation block one and two was selected. Major BBC news reports have been identified as
those that reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index Price between May 14,
1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report, while the second
observation block consists of the following 20 trading days.
0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
02-nov-88

15-nov-98
16-jul-87

19-oct-87

10-aug-88

16-jun-89

22-dec-89

12-jul-90

12-jan-91

14-jun-91

30-oct-91

12-feb-94

31-aug-94

03-oct-95

15-feb-96

22-feb-97

06-aug-97

10-apr-98

17-aug-98
18-mar-92

16-sep-92

14-sep-93

27-sep-96
Date of News Report 100
 Figure 13: Returns of Major BBC News Reports that Resulted in an Increase in Volatility (non-overlapping)

This graph shows all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999 which experience an increase in
variance after the news is released. Major News Reports which overlapped were selected on the basis of a two-tailed F test. The news report
with the greatest difference in variance between observation block one and two was selected. Major BBC news reports have been identified as
those that reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index Price between May 14,
1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report, while the second
observation block consists of the following 20 trading days.

0.01

0.005

0
Daily Return

-0.005

-0.01

Average Return Block 1 Average Return Block 2

-0.015

-0.02
10-aug-88

02-nov-88

31-aug-94

06-aug-97

17-aug-98

15-nov-98
16-jun-89

12-jan-91

14-jun-91
16-jul-87

22-dec-89

12-jul-90

16-sep-92

14-sep-93

27-sep-96

10-apr-98
12-feb-94

15-feb-96

22-feb-97
19-oct-87

30-oct-91

03-oct-95
18-mar-92

Date of News Report

101
Table 8: Comparison of the percentage change in return after Major BBC News
Reports that had an increase in Volatility.
Increases in Volatility (45)
News % Change in % Change in
Report News Headline Variance Return
3 Great British airline ready for take off 21% -192%
7 Superpower treaty to scrap warheads 11% -102%
10 Shares plunge after Wall Street crash 151% -1890%
13 Nurses protest for better pay 2% 450%
18 Mysterious seal disease spreads 25% -1043%
19 Shuttle blasts US back into space 4% -58%
21 Dead heat in Israel elections 21% -290%
26 Dozens die as plane crashes on motorway 29% 357%
33 Hungary reburies fallen hero Imre Nagy 12% 271%
37 Ten dead in Kent barracks bomb 30% -1060%
47 Brandenburg Gate re-opens 5% -112%
56 Hubble telescope takes off for space 30% 227%
60 Yeltsin resignation splits Soviet Communists 19% -155%
61 Briton shot by Iraqis 3% 15%
71 US Congress votes for war in Iraq 26% 303%
76 Jubilation follows Gulf War ceasefire 10% -48%
81 Iraqi Kurds fear US troop withdrawal 17% -125%
86 Superpowers to cut nuclear warheads 27% -83%
88 Bush opens historic Mid East peace conference 5% -9%
90 Maxwell business empire faces bankruptcy 19% 115%
94 South Africa votes for change 28% 390%
95 Riot police confront French truckers 13% 51%
97 UK crashes out of ERM 27% 386%
114 Failed Bosnian ceasefire threatens peace 16% 410%
118 UK tourist shot dead in Florida 11% 665%
119 Anglo-Irish pact paves way for peace 4% -16%
122 Art thieves snatch Scream 11% -3238%
127 Mandela becomes SA's first black president 10% -41%
132 IRA declares 'complete' ceasefire 18% -318%
138 Earthquake devastates Kobe 15% -126%
146 OJ Simpson verdict: 'Not guilty' 6% 166%
153 Bosnia peace accord ends three-year war 11% -113%
157 Arms-to-Iraq report published 21% -1459%
160 Israel launches attack on Beirut 8% -141%
163 Afghan forces routed as Kabul falls 1% 21%
165 Hijacked jet crashes into sea 33% 262%
166 Dolly the sheep is cloned 19% -166%
170 Labour to stub out tobacco sponsorship 24% -88%
174 Clinton signs bill to raise minimum wage 18% -93%
179 Earthquakes rock central Italy 20% -134%
188 Northern Ireland peace deal reached 14% -137%
190 World fury at Pakistan's nuclear tests 11% 82%
193 Clinton admits Lewinsky affair 34% 75%
196 Thousands flee fighting in Kosovo 10% 137%
197 Iraqi climbdown averts air strikes 2% -74%
Average 19% -153%
High 151% 665%
Low 1% -3238%
Positive 45 18
Negative 0 27

102
 Figure 14: Variance Before and After Major BBC News Reports that Resulted in a Decrease in Volatility (non-overlapping)

This graph shows all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999 which experience a decrease in
variance after the news is released. Major News Reports which overlapped were selected on the basis of a two-tailed F test. The news report
with the greatest difference in variance between observation block one and two was selected. Major BBC news reports have been identified as
those that reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index Price between May 14,
1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report, while the second
observation block consists of the following 20 trading days.

0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
24-mar-89

14-may-91

15may93
19-aug-87

18-nov-87

15-apr-88

03-jul-88

02-dec-88

07-nov-89

07-jul-90

22-oct-90

27-nov-90

30-aug-91

21-jan-92

01-jul-94

26-oct-94

11-dec-94

19-apr-95

11-jul-95

04-nov-95

15-jun-96

27-jul-96

06-apr-97

06-jul-97

07-jul-98
15-feb-89

11-feb-90

03-feb-98
Date of New s Report
103
 Figure 15: Returns Before and After Major BBC News Reports that Resulted in a Decrease in Volatility (non-overlapping)

This graph shows the average daily return before and after all non-overlapping major BBC news reports between June 11, 1987 and November
25, 1999 which experience a decrease in volatility after the news is released. Major News Reports which overlapped were selected on the basis
of a two-tailed F test. The news report with the greatest difference in variance between observation block one and two was selected. Major
BBC news reports have been identified as those that reached the history archives on the BBC news website. The data used was collected from
the FTSE 100 Index Price between May 14, 1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the
major news report, while the second observation block consists of the following 20 trading days.

0.006

0.004

0.002

0
Daily Return

-0.002

-0.004

-0.006
Average Return Block 1 Average Return Block 2
-0.008

-0.01

-0.012
21-jan-92

15-jun-96
04-nov-95
19-aug-87

18-nov-87

07-nov-89

27-nov-90

30-aug-91
15-feb-89

11-feb-90

03-feb-98
14-may-91

11-dec-94
15-apr-88

03-jul-88

02-dec-88

07-jul-90

15may93

01-jul-94

19-apr-95

11-jul-95

27-jul-96

06-apr-97

06-jul-97

07-jul-98
24-mar-89

22-oct-90

26-oct-94

104
Date of News Report
 Table 9: Changes in Volatility and Return after Major BBC News Reports

Decreases in Volatility (28)

News % Change in % Change in
Report News Headline Variance Return
5 Gunman kills 14 in Hungerford rampage -19% 142%
11 King's Cross station fire 'kills 27' -44% 93%
15 U.S and Iran clash in Persian Gulf -15% 93%
16 US warship shoots down Iranian airliner -7% -109%
Bangladesh cyclone 'worst for 20 years'.
22 Pan Am plane explodes over Lockerbie. -25% 124%
28 Soviet troops pull out of Afghanistan -16% -61%
29 Exxon Valdez creates oil slick disaster -10% -90%
40 Protests force out East German rulers -27% 383%
52 Freedom for Nelson Mandela -4% -84%
58 Three countries lift beef export ban -18% -112%
65 Aral Sea is 'world's worst disaster' -24% -94%
68 Tories choose Major for Number 10 -16% -97%
77 Mandela's wife jailed for kidnaps -14% 253%
87 U.S Suspends assistance to Haiti -27% -197%
92 UN threatens Libya with sanctions -18% -94%
110 French police rescue child hostages -20% -55%
128 Yasser Arafat ends 27-year exile -16% 285%
134 Israel and Jordan make peace -9% 164%
136 Russian troops storm into Chechnya -4% 175%
140 Many feared dead in Oklahoma bombing -14% 66%
142 Serbs overrun UN 'safe haven' -25% -89%
147 Israeli PM shot dead -15% 4083%
161 Huge explosion rocks central Manchester -1% -9%
162 Bomb rocks Atlanta Olympics -25% 847%
167 Fault cuts short space shuttle mission -20% 206%
172 Mars buggy starts exploring Red Planet -12% -68%
Military jet causes cable car tragedy.
186 Iraq reported to agree to lift arms inspection ban. -22% -46%
191 Chief's death sparks turmoil in Nigeria 0% -699%

Average -17% 179%

High -44% 4083%
Low -0.01% -699%
Positive 0 13
Negative 28 15

105
 Figure 16: Variance Before and After Major BBC News Reports that Resulted in a Decrease in Daily Return (non-overlapping)

This graph shows the variance before and after all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999 that
experienced a decrease in daily return after the news is released. Major News Reports that overlapped were selected on the basis of a two-tailed
F test. The news report with the greatest difference in variance between observation block one and two was selected. Major BBC news reports
have been identified as those that reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index
Price between May 14, 1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report,
while the second observation block consists of the following 20 trading days.

0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
02-nov-88
10-aug-88

31-aug-94

19-may-97

06-aug-97
16-jul-87

19-oct-87

22-dec-89

07-jul-90

22-oct-90

28-feb-91

31-jul-91

30-oct-91

15may93

12-feb-94

11-jul-95

15-feb-96

15-jun-96

03-feb-98

07-jul-98
24-mar-89

Date of News Report 106

 Figure 17: Variance Before and After Major BBC News Reports that Resulted in an Increase in Daily Return (non-overlapping)

This graph shows the variance before and after all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999 that
experienced an increase in daily return after the news is released. Major News Reports that overlapped were selected on the basis of a two-tailed
F test. The news report with the greatest difference in variance between observation block one and two was selected. Major BBC news reports
have been identified as those that reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index
Price between May 14, 1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report,
while the second observation block consists of the following 20 trading days.
0.25

Variance Before Variance After

0.2

0.15
Variance

0.1

0.05

0
18-nov-87

07-nov-89

04-nov-95

23-nov-96
14-may-91

28-may-98
19-aug-87

03-feb-88

15-apr-88

02-dec-88

08-jan-89

16-jun-89

24-apr-90

12-aug-90

12-jan-91

05-dec-91

06-jul-92

25-jul-93

01-jul-94

26-oct-94

11-dec-94

19-apr-95

03-oct-95

27-jul-96

06-apr-97

17-aug-98
18-mar-92

16-sep-92

14-sep-93

27-sep-96

22-sep-98
Date of News Report
107
Table 10: Changes in Volatility for Major BBC News Reports that Experienced
an Increase in Average Daily Return

Increases in Return (31)

News % Change in % Change in
Report News Headline Return Variance
5 Gunman kills 14 in Hungerford rampage 142% -19%
11 King's Cross station fire 'kills 27' 93% -44%
15 U.S and Iran clash in Persian Gulf 93% -15%
13 Nurses protest for better pay 450% 2%
Bangladesh cyclone 'worst for 20 years'.
22 Pan Am plane explodes over Lockerbie. 124% -25%
26 Dozens die as plane crashes on motorway 357% 29%
33 Hungary reburies fallen hero Imre Nagy 271% 12%
40 Protests force out East German rulers 383% -27%
56 Hubble telescope takes off for space 227% 30%
61 Briton shot by Iraqis 15% 3%
71 US Congress votes for war in Iraq 303% 26%
77 Mandela's wife jailed for kidnaps 253% -14%
90 Maxwell business empire faces bankruptcy 115% 19%
94 South Africa votes for change 390% 28%
95 Riot police confront French truckers 51% 13%
97 UK crashes out of ERM 386% 27%
114 Failed Bosnian ceasefire threatens peace 410% 16%
118 UK tourist shot dead in Florida 665% 11%
128 Yasser Arafat ends 27-year exile 285% -16%
134 Israel and Jordan make peace 164% -9%
136 Russian troops storm into Chechnya 175% -4%
140 Many feared dead in Oklahoma bombing 66% -14%
146 OJ Simpson verdict: 'Not guilty' 166% 6%
147 Israeli PM shot dead 4083% -15%
162 Bomb rocks Atlanta Olympics 847% -25%
163 Afghan forces routed as Kabul falls 21% 1%
165 Hijacked jet crashes into sea 262% 33%
167 Fault cuts short space shuttle mission 206% -20%
190 World fury at Pakistan's nuclear tests 82% 11%
193 Clinton admits Lewinsky affair 75% 34%
196 Thousands flee fighting in Kosovo 137% 10%

Average 364% 2%
High 4083% 34%
Low 15% -44%
Positive 31 18
Negative 0 13

108
 Figure 18: Major BBC News Reports that Resulted an Increase in Daily Return (non-overlapping)

This graph shows all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999 which experienced an increase
in daily return after the news is released. Major News Reports that overlapped were selected on the basis of a two-tailed F test. The news report
with the greatest difference in variance between observation block one and two was selected. Major BBC news reports have been identified as
those that reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index Price between May 14,
1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report, while the second
observation block consists of the following 20 trading days.

0.008

0.006

0.004

0.002

0
Daily Return

-0.002

-0.004

-0.006
Average Return Block 1 Average Return Block 2
-0.008

-0.01

-0.012
07-nov-89

04-nov-95

23-nov-96
19-aug-87

18-nov-87

08-jan-89

16-jun-89

12-aug-90

12-jan-91

17-aug-98
02-dec-88

14-may-91

05-dec-91

16-sep-92

14-sep-93

11-dec-94

27-sep-96

22-sep-98
15-apr-88

24-apr-90

06-jul-92

25-jul-93

01-jul-94

19-apr-95

27-jul-96

06-apr-97

28-may-98
03-feb-88

18-mar-92

26-oct-94

03-oct-95
Date of News Report
109
 Table 11: The Percentage Change in Volatility of Major BBC News Reports that
Resulted in a Decrease in Return After Release.
Decreases in Return (42)
News % Change in % Change in
Report Event Headline Return Variance
3 Great British airline ready for take off -193% 21%
7 Superpower treaty to scrap warheads -102% 11%
10 Shares plunge after Wall Street crash -1890% 151%
16 US warship shoots down Iranian airliner -109% -7%
18 Mysterious seal disease spreads -1043% 25%
19 Shuttle blasts US back into space -58% 4%
21 Dead heat in Israel elections -290% 21%
28 Soviet troops pull out of Afghanistan -61% -16%
29 Exxon Valdez creates oil slick disaster -90% -10%
37 Ten dead in Kent barracks bomb -1060% 30%
47 Brandenburg Gate re-opens -112% 5%
52 Freedom for Nelson Mandela -84% -4%
58 Three countries lift beef export ban -112% -18%
60 Yeltsin resignation splits Soviet Communists -155% 19%
65 Aral Sea is 'world's worst disaster' -94% -24%
68 Tories choose Major for Number 10 -97% -16%
76 Jubilation follows Gulf War ceasefire -48% 10%
81 Iraqi Kurds fear US troop withdrawal -125% 17%
86 Superpowers to cut nuclear warheads -83% 27%
88 Bush opens historic Mid East peace conference -9% 5%
87 U.S Suspends assistance to Haiti -197% -27%
92 UN threatens Libya with sanctions -94% -18%
110 French police rescue child hostages -55% -20%
119 Anglo-Irish pact paves way for peace -16% 4%
122 Art thieves snatch Scream -3238% 11%
127 Mandela becomes SA's first black president -41% 10%
132 IRA declares 'complete' ceasefire -318% 18%
138 Earthquake devastates Kobe -126% 15%
142 Serbs overrun UN 'safe haven' -89% -25%
153 Bosnia peace accord ends three-year war -113% 11%
157 Arms-to-Iraq report published -1459% 21%
160 Israel launches attack on Beirut -141% 8%
161 Huge explosion rocks central Manchester -9% -1%
166 Dolly the sheep is cloned -166% 19%
170 Labour to stub out tobacco sponsorship -88% 24%
172 Mars buggy starts exploring Red Planet -68% -12%
174 Clinton signs bill to raise minimum wage -93% 18%
179 Earthquakes rock central Italy -134% 20%
Military jet causes cable car tragedy.
186 Iraq reported to agree to lift arms inspection ban. -46% -22%
188 Northern Ireland peace deal reached -137% 14%
191 Chief's death sparks turmoil in Nigeria -699% 0%
197 Iraqi climbdown averts air strikes -74% 2%

Average -315% 8%
High -3238% 151%
Low -9% -27%
Positive 0 28
Negative 42 14

110
 Figure 19: Major BBC News Reports that Resulted a Decrease in Daily Return (non-overlapping)

This graph shows the variance before and after all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999
which experienced a decrease in daily return after the news is released. Major News Reports which overlapped were selected on the basis of a
two-tailed F test. The news report with the greatest difference in variance between observation block one and two was selected. Major BBC
news reports have been identified as those that reached the history archives on the BBC news website. The data used was collected from the
FTSE 100 Index Price between May 14, 1987 and December 23, 1998. Observation block one consists of 20 trading days plus the day of the
major news report, while the second observation block consists of the following 20 trading days.

0.01

0.005

0
Daily Return

-0.005

-0.01 Average Return Block 1 Average Return Block 2

-0.015

-0.02
10-aug-88

02-nov-88

31-aug-94

15-jun-96

06-aug-97
16-jul-87

28-feb-91

15-feb-96

19-may-97

03-feb-98
22-dec-89

07-jul-90

31-jul-91

15may93

12-feb-94

11-jul-95

07-jul-98
19-oct-87

24-mar-89

22-oct-90

30-oct-91

Date of News Report

111
Figure 20: Variance Before and After Major BBC News Report Day compared with the Maximum and Minimum Variance throughout
the 1st and 2nd observation blocks (non-overlapping)

This graph shows the variance before and after all non-overlapping major BBC news reports between June 11, 1987 and November 25, 1999.
These variances can then be viewed in comparison to the maximum and minimum variances throughout the duration of the two observation
blocks and on the event day. Major News Reports which overlapped were selected on the basis of a two-tailed F test. The news report with the
greatest difference in variance between observation block one and two was selected. Major BBC news reports have been identified as those that
reached the history archives on the BBC news website. The data used was collected from the FTSE 100 Index Price between May 14, 1987 and
December 23, 1998. Observation block one consists of 20 trading days plus the day of the major news report, while the second observation
block consists of the following 20 trading days.
0.45

0.4 Variance Block 1 Variance Block 2 Event Day Variance Max Variance (All) Min Variance (All)

0.35

0.3

0.25
Variance

0.2

0.15

0.1

0.05

0
31 -9 1

8
-s 87

-o 0

-o 1

m 2

5
-o 4
9

3
-m 9

-m 91

11 -95
06 -92

-s 6
-n 8

-ja 8
-n 7

-a 7

-d 9

-a 9

-fe 5

-fe 6
-fe 3

-fe 7

8
-n 8
-a 8

12 90

12 t-90

21 t-91

17 t-94

15 -96

-m 7
01 94

-m 8
22 l-9

30 l-9

15 l-9

04 u l-9
26 l-9
22 ar-8

06 y-9

17 y-9
14 a y9
24 n-8

27 n-9
02 g-8

03 g-9

15 g-9
10 r-8
18 p-8

15 v-8

08 -8

22 p-8

24 c-8

15 v-9

22 p-9
12 p-9

-9
19 b-9

28 b-9
18 ju l-

14 n-
-

b-

n
n
ay
ov

ov
pr

b
-ju

-ju

-ju

-ju
c

a
p

-ja

-ja

-ja

-ju
o

u
e

e
-j
-

-n

-a

-a
-s

-s
16

112
Date of New s Report
Table 12: Changes in Volatility and Average Daily Returns after BBC News
Reports regarding Wars

WARS (28)
News Change in % Change Change % Change
Report News Headline Variance in Variance in Return in Return
Gunman kills 14 in Hungerford
5 rampage -0.02006 -19% 0.00392 142%
15 U.S and Iran clash in Persian Gulf -0.01486 -15% 0.00183 93%
US warship shoots down Iranian
16 airliner -0.00639 -7% -0.00120 -109%
28 Soviet troops pull out of Afghanistan -0.01610 -16% -0.00255 -61%
37 Ten dead in Kent barracks bomb 0.02417 30% -0.00385 -1060%
61 Briton shot by Iraqis 0.00320 3% 0.00046 15%
71 US Congress votes for war in Iraq 0.02016 26% 0.00446 303%
Jubilation follows Gulf War
76 ceasefire 0.00927 10% -0.00199 -48%
Iraqi Kurds fear US troop
81 withdrawal 0.01304 17% -0.00161 -125%
Superpowers to cut nuclear
86 warheads 0.02098 27% -0.00256 -83%
Bush opens historic Mid East peace
88 conference 0.00465 5% -0.00017 -9%
Failed Bosnian ceasefire threatens
114 peace 0.01031 16% 0.00509 410%
132 IRA declares 'complete' ceasefire 0.01352 18% -0.00466 -318%
Russian troops storm into
136 Chechnya -0.00342 -4% 0.00188 175%
Many feared dead in Oklahoma
140 bombing -0.01104 -14% 0.00060 66%
142 Serbs overrun UN 'safe haven' -0.02398 -25% -0.00147 -89%
147 Israeli PM shot dead -0.01283 -15% 0.00213 4083%
157 Arms-to-Iraq report published 0.01423 21% -0.00076 -1459%
160 Israel launches attack on Beirut 0.00543 8% -0.00171 -141%
Huge explosion rocks central
161 Manchester -0.00093 -1% -0.00004 -9%
162 Bomb rocks Atlanta Olympics -0.02234 -25% 0.00317 847%
163 Afghan forces routed as Kabul falls 0.00096 1% 0.00018 21%
165 Hijacked jet crashes into sea 0.02300 33% 0.00237 262%
Military jet causes cable car
tragedy.
Iraq reported to agree to lift arms
186 inspection ban. -0.02321 -22% -0.00150 -46%
Northern Ireland peace deal
188 reached 0.01209 14% -0.00393 -137%
World fury at Pakistan's nuclear
190 tests 0.01045 11% 0.00043 82%
196 Thousands flee fighting in Kosovo 0.01427 10% 0.00901 137%
197 Iraqi climbdown averts air strikes 0.00218 2% -0.00234 -74%

Average 0.00167 3% 0.00019 102%

Positive 17 13
Negative 11 15

113
Table 13: Changes in Volatility and Average Daily Returns after BBC News
Reports regarding Politics and Religion

POLITICS/RELIGION (24)
News Change in % Change Change % Change
Report News Headline Variance in Variance in Return in Return
Superpower treaty to scrap
7 warheads 0.00881 11% -0.00236 -102%
13 Nurses protest for better pay 0.00176 2% 0.00117 450%
21 Dead heat in Israel elections 0.01513 21% -0.00261 -290%
Hungary reburies fallen hero
33 Imre Nagy 0.00950 12% 0.00494 271%
Protests force out East German
40 rulers -0.03154 -27% 0.00453 383%
47 Brandenburg Gate re-opens 0.00417 5% -0.00337 -112%
52 Freedom for Nelson Mandela -0.00393 -4% -0.00092 -84%
Yeltsin resignation splits Soviet
60 Communists 0.01572 19% -0.00145 -155%
Tories choose Major for
68 Number 10 -0.01450 -16% -0.00287 -97%
U.S Suspends assistance to
87 Haiti -0.02778 -27% -0.00145 -197%
UN threatens Libya with
92 sanctions -0.01692 -18% -0.00322 -94%
94 South Africa votes for change 0.03285 38% 0.00372 390%
Riot police confront French
95 truckers 0.01190 13% 0.00155 51%
97 UK crashes out of ERM 0.02722 27% 0.00758 386%
French police rescue child
110 hostages -0.01728 -20% -0.00025 -55%
Anglo-Irish pact paves way for
119 peace 0.00371 4% -0.00034 -16%
Mandela becomes SA's first
127 black president 0.00826 10% -0.00042 -41%
Yasser Arafat ends 27-year
128 exile -0.01626 -16% 0.00399 285%
134 Israel and Jordan make peace -0.00883 -9% 0.00108 164%
Bosnia peace accord ends
153 three-year war 0.00725 11% -0.00084 -113%
Labour to stub out tobacco
170 sponsorship 0.01668 24% -0.00375 -88%
Clinton signs bill to raise
174 minimum wage 0.01662 18% -0.00199 -93%
Chief's death sparks turmoil in
191 Nigeria -0.00001 0.00% -0.00181 -699%
193 Clinton admits Lewinsky affair 0.03658 34% 0.00490 75%

Average 0.00330 5% 0.00024 9%

Positive 15 9
Negative 9 15

114
 Table 14: Headlines of all 198 Major BBC News Reports.

In total there were 198 news reports that were classified as major in the British
publics opinion, between June 11, 1987 and November 25, 1999. These can be found
on the BBC “on this day” website.
http://news.bbc.co.uk/onthisday/hi/years/default.stm The 73 News Reports in bold
text are those selected so as to avoid overlapping. Major News Reports which
overlapped were selected on the basis of a two-tailed F test. The news report with the
greatest difference in variance between observation block one and two were selected.
The data used was collected from the FTSE 100 Index Price between May 14, 1987
and December 23, 1998. Observation block one consists of 20 trading days plus the
day of the major news report, while the second observation block consists of the
following 20 trading days.

News
Report Date News Headline
1 05-jun-87 Thatcher wins record third term
2 01-jul-87 Stock-broker guilty of corruption
3 16-jul-87 Great British airline ready for take off
4 07-aug-87 Chilly swim thaws Cold War relations
5 19-aug-87 Gunman kills 14 in Hungerford rampage
6 09-sep-87 Liverpool fans to stand trial in Belgium
7 18-sep-87 Superpower treaty to scrap warheads
8 30-sep-87 Major earthquake strikes Los Angeles
9 15-sep-87 Fiji one step closer to a republic
10 19-oct-87 Shares plunge after Wall Street crash
11 18-nov-87 King's Cross station fire 'kills 27'
12 08-dec-87 Superpowers to reverse arms race
13 03-feb-88 Nurses protest for better pay
14 04-feb-88 Defiant seamen strike on
15 15-apr-88 U.S and Iran clash in Persian Gulf
16 03-jul-88 US warship shoots down Iranian airliner
17 06-jul-88 Piper Alpha oil rig ablaze
18 10-aug-88 Mysterious seal disease spreads
19 29-sep-88 Shuttle blasts US back into space
20 09-oct-88 Latvia cries freedom from Moscow
21 02-nov-88 Dead heat in Israel elections
Bangladesh cyclone 'worst for 20 years'.
22 02-dec-88 Pan Am plane explodes over Lockerbie.
23 03-dec-88 Egg industry fury over salmonella claim
24 21-dec-88 Jumbo jet crashes onto Lockerbie
25 24-dec-88 Oilfields crippled after storage ship drifts
26 08-jan-89 Dozens die as plane crashes on motorway
27 23-jan-89 Many killed in Tajik earthquake
28 15-feb-89 Soviet troops pull out of Afghanistan
29 24-mar-89 Exxon Valdez creates oil slick disaster
30 27-mar-89 Millions of Russians go to the polls

115
31 15-apr-89 Soccer fans crushed at Hillsborough
32 04-jun-89 Massacre in Tiananmen Square
33 16-jun-89 Hungary reburies fallen hero Imre Nagy
34 18-aug-89 Man U sold in record takeover deal
35 20-aug-89 Marchioness river crash 'kills 30'
36 25-aug-89 Voyager spacecraft reaches Neptune
37 22-sep-89 Ten dead in Kent barracks bomb
38 17-oct-89 Earthquake hits San Francisco
39 18-oct-89 East Germany leader ousted
40 07-nov-89 Protests force out East German rulers
41 09-nov-89 Berliners celebrate the fall of the Wall
42 17-nov-89 Police crush Prague protest rally
43 18-nov-89 Protesters demand reform in Bulgaria
44 24-nov-89 New era for Czechoslovakia
45 03-dec-89 Malta summit ends Cold War
46 20-dec-89 US forces oust General Noriega
47 22-dec-89 Brandenburg Gate re-opens
48 25-dec-89 Romania's 'first couple' executed
49 22-jan-90 Gorbachev explains crackdown in Azerbaijan
50 28-jan-90 Romanians call for government change
51 20-feb-90 De Klerk dismantles apartheid in South Africa
52 11-feb-90 Freedom for Nelson Mandela
53 31-mar-90 Violence flares in poll tax demonstration
54 01-apr-90 Rioting inmates take over Strangeways
55 11-apr-90 Customs seize 'supergun'
56 24-apr-90 Hubble telescope takes off for space
57 03-may-90 Latvia to declare independence
58 07-jul-90 Three countries lift beef export ban
59 20-jun-90 Major proposes new Euro currency
60 12-jul-90 Yeltsin resignation splits Soviet Communists
61 12-aug-90 Briton shot by Iraqis
62 23-aug-90 Outrage at Iraqi TV hostage show
63 28-aug-90 East and West Germany reunited
64 08-oct-90 Britain's first full day in ERM
65 22-oct-90 Aral Sea is 'world's worst disaster'
66 01-nov-90 Howe resigns over Europe policy
67 22-nov-90 Thatcher quits as prime minister
68 27-nov-90 Tories choose Major for Number 10
69 10-dec-90 Iraq frees British hostages
70 26-dec-90 Iranian leader upholds Rushdie fatwa
71 12-jan-91 US Congress votes for war in Iraq
72 18-jan-91 Iraqi Scud missiles hit Israel
73 22-feb-91 Bush threatens Iraq with land war
74 14-feb-91 Warsaw Pact dissolves military alliance
75 26-feb-91 Iraqi troops flee Kuwait City

116
 76 28-feb-91 Jubilation follows Gulf War ceasefire
77 14-may-91 Mandela's wife jailed for kidnaps
78 18-may-91 Sharman becomes first Briton in space
79 21-may-91 Bomb kills India's former leader Rajiv Gandhi
80 13-jun-91 Yeltsin wins first Russian elections
81 14-jun-91 Iraqi Kurds fear US troop withdrawal
82 27-jun-91 Yugoslav troops move against Slovenia
83 05-jul-91 International bank closed in fraud scandal
84 09-jul-91 Bank collapse costs taxpayers millions
85 14-jul-91 UK forces withdraw from Kurdish haven
86 31-jul-91 Superpowers to cut nuclear warheads
87 30-aug-91 U.S Suspends assistance to Haiti
88 30-oct-91 Bush opens historic Mid East peace conference
89 04-dec-91 Last US hostage freed
90 05-dec-91 Maxwell business empire faces bankruptcy
91 25-dec-91 Gorbachev resigns as Soviet Union breaks up
92 21-jan-92 UN threatens Libya with sanctions
93 07-feb-92 Maastricht treaties make EU official
94 18-mar-92 South Africa votes for change
95 06-jul-92 Riot police confront French truckers
96 25-jul-92 World unites at Barcelona Olympics
97 16-sep-92 UK crashes out of ERM
98 04-nov-92 Clinton beats Bush to the White House
99 29-aug-92 Violence mars German anti-racist rally
100 06-dec-92 Mob rips apart mosque in Ayodhya
101 09-dec-92 American marines land in Somalia
102 03-jan-93 US and Russia halve nuclear warheads
103 05-jan-93 Oil tanker runs aground off Shetland
104 26-feb-93 World Trade Center bomb terrorises New York
105 12-mar-93 Bombay hit by devastating bombs
106 20-mar-93 Child killed in Warrington bomb attack
107 16-apr-93 UN makes Srebrenica 'safe haven'
108 24-apr-93 IRA bomb devastates City of London
109 26-apr-93 Recession over - it's official
110 15may93 French police rescue child hostages
111 24-jun-93 Minister resigns over business links
112 13-jul-93 Green light for Manchester Olympics
113 16-jul-93 Secret Service goes public
114 25-jul-93 Failed Bosnian ceasefire threatens peace
115 02-oct-93 Hardline Communists riot in Moscow
116 04-oct-93 US forces killed in Somali gun battle
117 13-sep-93 Rabin and Arafat shake on peace deal
118 14-sep-93 UK tourist shot dead in Florida
119 15-dec-93 Anglo-Irish pact paves way for peace
120 17-jan-94 Massive earthquake hits Los Angeles

117
121 05-feb-94 Market massacre in Sarajevo
122 12-feb-94 Art thieves snatch Scream
123 25-feb-94 Jewish settler kills 30 at holy site
124 27-mar-94 Maiden flight for future fighter jet
125 06-apr-94 Rwanda presidents' plane 'shot down'
126 21-apr-94 Guildford Four' man cleared of IRA murder
127 10-may-94 Mandela becomes SA's first black president
128 01-jul-94 Yasser Arafat ends 27-year exile
129 21-jul-94 Labour chooses Blair
130 26-jul-94 Israel's London embassy bombed
131 28-aug-94 Sunday trading legalised
132 31-aug-94 IRA declares 'complete' ceasefire
133 28-sep-94 Hundreds feared dead in ferry disaster
134 26-oct-94 Israel and Jordan make peace
135 30-nov-94 Blazing liner abandoned off east Africa
136 11-dec-94 Russian troops storm into Chechnya
137 30-dec-94 Gunman kills two women at abortion clinic
138 17-jan-95 Earthquake devastates Kobe
139 09-feb-95 Space pioneers take first small steps
140 19-apr-95 Many feared dead in Oklahoma bombing
141 29-jun-95 US shuttle docks with Russian space station
142 11-jul-95 Serbs overrun UN 'safe haven'
143 15-jul-95 Serbs force Muslims out of Srebrenica
144 23-jul-95 British forces sent to Sarajevo
145 28-sep-95 Palestinian self-rule in West Bank agreed
146 03-oct-95 OJ Simpson verdict: 'Not guilty'
147 04-nov-95 Israeli PM shot dead
148 10-nov-95 Nigeria hangs human rights activists
149 21-nov-95 Balkan leaders agree to peace
150 30-nov-95 Clinton kindles hope in Northern Ireland
151 02-dec-95 Rogue trader jailed for six years
152 05-dec-95 Jaffna falls to Sri Lankan army
153 14-dec-95 Bosnia peace accord ends three-year war
154 02-jan-96 US peacekeepers pour into Bosnia
155 29-jan-96 France halts nuclear testing
156 10-feb-96 Docklands bomb ends IRA ceasefire
157 15-feb-96 Arms-to-Iraq report published
158 18-feb-96 Bomb blast destroys London bus
159 29-feb-96 Siege of Sarajevo is lifted
160 11-apr-96 Israel launches attack on Beirut
161 15-jun-96 Huge explosion rocks central Manchester
162 27-jul-96 Bomb rocks Atlanta Olympics
163 27-sep-96 Afghan forces routed as Kabul falls
164 16-oct-96 Handguns to be banned in the UK
165 23-nov-96 Hijacked jet crashes into sea

118
166 22-feb-97 Dolly the sheep is cloned
167 06-apr-97 Fault cuts short space shuttle mission
168 22-apr-97 Troops storm embassy in Peru
169 06-may-97 Brown sets Bank of England free
170 19-may-97 Labour to stub out tobacco sponsorship
171 19-jun-97 Victory for McDonald's - at a cost
172 06-jul-97 Mars buggy starts exploring Red Planet
173 19-jul-97 IRA declares ceasefire
174 06-aug-97 Clinton signs bill to raise minimum wage
175 31-aug-97 Princess Diana dies in Paris crash
176 04-sep-97 Suicide bombings put peace visit in doubt
177 05-sep-97 Mother Teresa dies
178 12-sep-97 Scots say 'Yes' to home rule
179 26-sep-97 Earthquakes rock central Italy
180 03-nov-97 Angry truckers blockade French ports
181 13-nov-97 World Islamic Conference denounces terrorism
182 18-dec-97 Dawn of Scottish parliament
183 11-jan-98 100 die in massacre in Algeria
184 16-jan-98 Four pupils go on trial for sex attack
185 26-jan-98 Clinton denies affair with intern
Military jet causes cable car tragedy. Iraq reported to
186 03-feb-98 agree to lift arms inspection ban.
187 04-feb-98 4,000 feared dead in Afghan earthquake
188 10-apr-98 Northern Ireland peace deal reached
189 11-may-98 India explodes nuclear controversy
190 28-may-98 World fury at Pakistan's nuclear tests
191 07-jul-98 Chief's death sparks turmoil in Nigeria
192 07-aug-98 US embassies in Africa bombed
193 17-aug-98 Clinton admits Lewinsky affair
194 03-sep-98 All feared dead in Swissair crash
195 08-sep-98 Real IRA announce ceasefire
196 22-sep-98 Thousands flee fighting in Kosovo
197 15-nov-98 Iraqi climbdown averts air strikes
198 25-nov-98 Corrupt' Turkish government falls

119
 Table 15: News Headlines that fell into the 5% tail of an F test

This table shows the Major News Report Headlines that fell into the 5% tail of an F
test. From the 73 non-overlapping news reports there were 17 that fell below the 5%
critical range. The data used was collected from the FTSE 100 Index Price between
May 14, 1987 and December 23, 1998. Observation block one consists of 20 trading
days plus the day of the major news report, while the second observation block
consists of the following 20 trading days.

News Event
Report Date Headline
10 19-oct-87 Shares plunge after Wall Street crash
11 18-nov-87 King's Cross station fire 'kills 27'
Bangladesh cyclone 'worst for 20 years'.
22 02-dec-88 Pan Am plane explodes over Lockerbie.
26 08-jan-89 Dozens die as plane crashes on motorway
37 22-sep-89 Ten dead in Kent barracks bomb
40 07-nov-89 Protests force out East German rulers
56 24-apr-90 Hubble telescope takes off for space
65 22-oct-90 Aral Sea is 'world's worst disaster'
86 31-jul-91 Superpowers to cut nuclear warheads
87 30-aug-91 U.S Suspends assistance to Haiti
94 18-mar-92 South Africa votes for change
97 16-sep-92 UK crashes out of ERM
142 11-jul-95 Serbs overrun UN 'safe haven'
162 27-jul-96 Bomb rocks Atlanta Olympics
167 06-apr-97 Fault cuts short space shuttle mission
Military jet causes cable car tragedy.
186 03-feb-98 Iraq reported to agree to lift arms inspection ban.
193 17-aug-98 Clinton admits Lewinsky affair

120