The Persistent Effects of a False News Shock

31 Pages Posted: 17 Nov 2011  

Carlos Carvalho

Government of the Federative Republic of Brazil - Central Bank of Brazil; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Nicholas Klagge

Federal Reserve Bank of New York

Emanuel Moench

Deutsche Bundesbank

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2011

Abstract

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company's stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the "news" had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at the level predicted by the asset-pricing model. We investigate several potential explanations for this finding, but fail to find empirical evidence supporting any of them. We also document that the false news shock had a persistent negative effect on the stock prices of other major airline companies. This is consistent with the view that contagion effects would have dominated competitive effects had the bankruptcy actually taken place.

Keywords: false news, natural experiment, United Airlines, noise, market efficiency, contagion

JEL Classification: G10, G14

Suggested Citation

Carvalho, Carlos and Klagge, Nicholas and Moench, Emanuel, The Persistent Effects of a False News Shock (June 1, 2011). Available at SSRN: https://ssrn.com/abstract=1363762 or http://dx.doi.org/10.2139/ssrn.1363762

Carlos Carvalho (Contact Author)

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Nicholas Klagge

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

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