Something in the Air: Information Density, News Surprises, and Price Jumps
87 Pages Posted: 4 Sep 2015 Last revised: 27 Sep 2016
Date Written: August 1, 2015
This paper introduces a new information density indicator to provide a more comprehensive understanding of price reactions to news and, more specifically, to the sources of jumps in financial markets. Our information density indicator, which measures the abnormal amount of noisy “ticker” news before scheduled macroeconomic announcements, is significantly related to the likelihood of price jumps and independent of the magnitude of news surprises or pre-announcement trading activity. We therefore interpret this variable as a measure of additional uncertainty in the market, which is resolved by macroeconomic news as “hard” facts.
Keywords: Information density, jump identification, macroeconomic announcements, noisy information, price discovery process
JEL Classification: C58, F31, G12, G14, G15
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