The Handbook of News Analytics in Finance

3.7 EVENT STUDY ANALYSIS THROUGH SEPTEMBER 2008

In the preceding sections, we have focused on event analysis with respect to foreign exchange during the period from January 2003 through July 2007. In this section, we update the results through September 2008, and also consider the impact of Thomson Reuters NewsScope Event Indices on 11 equity indices.

Tables 3.3 and 3.4 report the t-statistics for event analyses of event indices on the returns and volatility of the same 16 currency pairs as before (see Table 3.2), and Tables 3.5 and 3.6 contain t-statistics for the corresponding event analyses for 11 equity indices.

Tables 3.3 and 3.4 show that the event indices have little power to forecast movements in exchange rates, but significant power to forecast exchange rate volatility. However, Tables 3.5 and 3.6 tell a very different story for equity indices—the event indices do seem to have some predictive power for equity index returns, as well as for equity index volatility. One possible explanation for this difference is that equities are not as liquid, hence the impact of news is incorporated into currencies faster than equity indices. While this may suggest potential profit opportunities in equity indices, transactions costs are considerably higher for stock index futures than for currencies given comparable notional exposures. Therefore the magnitude of profits from real-time news-based strategies in equities is an open empirical question.

However, there is no doubt that the event ...