E-Book Review: Impact of Economic News on Financial Markets
Reviewing an economics study paper that is years old but is still relevant today is an odd experience. The Impact of Economic News on Financial Markets published by John C. Parker in April 2007 is a good example of such a document. John is an econometrician with nearly 50 years of experience now who also worked as a Chief Economist at Impact Infrastructure. He wrote this
The Impact of Economic News on Financial Markets studies the effect of news announcements on various financial markets (Forex, stock index, commodities). The study is based on the difference between forecast indicator values and the actual indicator values. Forecast values are based on the derivative market prices and not on the consensus forecasts by economists. The effect of news is studied on a 30-minutes window following the news release time. Correlations between effects on 6 currency pairs are measured.
Here is the range of conclusions that you will likely to be most useful and relevant to the modern retail Forex market:
- There is significant impact of some news releases on the Forex market (nonfarm payrolls, trade balance, GDP, retail sales, initial jobless claims).
- The main impact is felt during the first minute after the release. This is especially evident in the Forex market. Trading the news some half an hour after the announcement is not actually news trading.
- The higher the difference between forecast and actual values, the bigger the impact.
- Forecasts from the derivative markets (e.g., event options at NADEX) work better than the consensus forecasts (higher correlation between forecast/actual difference and impact).
- Negative news announcements demonstrate stronger impact on markets than positive surprises.
The advantages of this
- Measured effects — everything is supported with real data and calculations. All statements are well referenced.
- Timing study — John Parker tracks the market movement using 1-minute timeframe during each of the 30 minutes after the macroeconomic indicator is released. It is easy to see how the effect on currency pairs is fading with time.
- Multiple assets — the author does not limit his test with EUR/USD but instead uses 6 currency pairs, 4 commodities, 1 stock market index, and 4 US Treasury notes of varying maturity.
- The main disadvantage is that it is largely outdated. The markets have changed significantly since before 2007. Although the main conclusions still hold, the difference is in nuances. For example, everything written about Swiss franc is hardly applicable to the periods when the currency is being pegged by the Swiss National Bank. The derivative markets used for news predictions in the paper no longer operate. Also, hardly any of the URLs provided in the article work anymore.
- Limited scope — no research of the monetary policy decisions, which appear to be the major market movers in post-2008 markets. There is also no research on foreign macro releases except EU HICP.
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