Stock prices experience a constant variance in financial markets all over the world. There is no sure shot method of determining changes and degree of changes in the price of the stock but one thing is certain that financial news, both positive and negative has the power to move the price of stock across financial markets globally.
Financial advisors often advise investors to not make immediate investment decisions on basis of recent financial news as, by the time they have heard the sad news, it is highly likely that the market flux has come and gone.
Two of the basic principles of efficient financial markets speculation is that current market prices shall always reflect the total knowledge and expectations of all investors, and any new financial news and information must be circulated immediately to the public so as to allow prices to immediately to adjust to new data. A notable amount of body of literature is available to measure the speed, and the efficiency of the market adjustment in relation to the new information released and test how fast prices adjust to the new financial news and information. Investors can stand to make a hefty profit in the event the initial reaction of the financial markets is slow to the latest news.
Reactions Of U.k. Financial Markets
A study was conducted to study the efficiency of the financial markets in the United Kingdom to analyze the impact of recent economic announcements including inflation data, retail sales data, financial results, financial news, etc on stocks listed on the FTSE 100 (Financial-Times Stock Exchange 100). The same study was carried out on fixed income instruments as well.
It was concluded that the U.K. financial markets just took a mere 75-90 seconds, i.e. about 7 trades, to adjust to the new data. The fixed income markets also took the same amount of time to adjust to the new data and financial news.
Reactions Of U.S. Financial Markets
Normally, it has been noticed that when financial news and data are released, it results in a rapid increase in volatility of stock prices, though the majority of the effect is relatively short-lived and subsides within the first minute.
For example, a study was conducted to study and analyze how quickly the U.S. fixed income markets adjusted to the release of new financial news and information, and it was found that a substantial portion of the reasons causing changes in the interest rates can be attributed to scheduled macroeconomic announcements such as inflation data, employment reports, etc. The window for major adjustment to the information released lasts for a mere 40 seconds and hence has a very short window for trading profits.
A similar reaction was seen post-after-trading-hours quarterly earnings announcements of NYSE 100 and NASDAQ 100 firms, where it was found that the majority of the price response was realized during opening trading. Any announcement of earnings which had taken place during trading hours had caused adjustments to occur pretty quickly; and for stocks listed on the NYSE, the price adjustment had occurred during the first several post-announcement trades; and for stocks listed on the NASDAQ, the price adjustment took place during the first post-announcement trade. One would likely conclude that the financial markets in the United States are very efficient in processing newly released information and incorporating the same into its valuations.
Reactions Of Australian Financial Markets
A study was conducted in Australia to analyze the impact and time required for financial markets to adjust stock prices in relation to the release of financial news and announcements and the following observations were made.
- Interest rate futures adjusted quickly in relation to the major scheduled macroeconomic announcements with a significant part of the reaction were completed within 30 seconds.
- Volatility is notably higher during major announcement days for a period of at least 30 seconds prior to the release of data, during the said period the bid-ask spreads are high. The spreads return back to normal within 30 seconds of the announcement.
- In the 30 seconds period post a scheduled announcement, the volume of trading activity higher than usual levels, with a sharp increase in price volatility.
- There was no evidence of any form of insider trading indicating that no information was leaked prior to the announcement.
Further according to this research, there is a large volume of evidence of constant and quick readjustments on stock prices on financial markets in an event of a release of any new financial news.
We can draw a conclusion from the reaction of the above three financial markets to the release of new financial news and data that the markets will immediately react, and investors should not as by the time an investor gets the latest news, the financial markets have already reacted and adjusted share prices in accordance to the newly released data.