Information Driven Price Jumps and Trading Strategy: Evidence from Stock Index Futures

Abstract:     
In this paper we apply a relatively new nonparametric jump identification technique to examine the role of the 8:30am and 10:00am macroeconomic news announcements in explaining large and significant discontinuities in intraday futures prices on the Dow, Nasdaq and S&P 500 indices. We document a strong relationship between the two sets of morning economic news releases and “jumps” in equity index futures prices. We find that good (bad) economic news is followed by positive (negative) jumps and that the responses are asymmetric; bad news has a larger impact on returns than good news. Our results also provide insights into the speed of news absorption. Finally, we construct a high frequency trading rule to determine whether the observed relations can be used to generate trading profits. Using the 10:00 am announcement and after accounting for transaction costs, the returns from 1-minute holding positions aggregated over the 10-year sample period range between 16-29%.

Number of Pages in PDF File: 51

Keywords: Macroeconomic News, Jumps, Index Futures, Trading Strategy

JEL Classification: G10, G14

working papers series