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On the stock exchange, every minute counts

15.11.2007
When the US Federal Reserve cut interest rates by 0.5% on 18 September, share prices rose 1.5% on the New York stock exchange within five minutes.

According to Financial Econometrics Professor Dick van Dijk, recently developed econometric techniques making it possible to measure the impact of an interest rate adjustment on share prices more precisely. He discovered that there are sharp differences between the effects of good news and of bad news. On Thursday, 15 November 2007, Prof. van Dijk will deliver his inaugural lecture entitled Good news is no news at the Erasmus University Rotterdam.

News plays a crucial role in pricing on financial markets. In an efficient market, current prices reflect all the information available at that moment, so that only genuinely new information will lead to a price adjustment. The smallest unexpected adjustment in interest rates has an immediate impact on all share prices, while a large interest rate adjustment that investors already expected will not generate a response on the stock markets.

Van Dijk shows that it is possible to measure the effects of an adjustment in US interest rates precisely if you track share prices on the New York stock exchange up to the minute. An unexpected interest rate adjustment of 0.25% leads to a return of more than 1% within five minutes of the news being announced.

The effects of positive and negative news on share prices also differ considerably. Only if there is good news does the stock market response depend on the amount of the unexpected cut in interest rates. If there is bad news, prices respond only to the fact that the interest rate increase was unexpected.

Dick van Dijk (1971) is a Professor of Financial Econometrics at the Econometric Institute of the Economic Sciences Faculty. He received his PhD (cum laude) in 1999 from the Erasmus University Rotterdam. His research focused on econometric models to describe and predict financial variables such as share risks and returns. He has published in the Journal of Applied Econometrics, the Journal of Business and Economic Statistics, the Journal of Econometrics, the Journal of Empirical Finance and the Review of Economics and Statistics, and co-authored Nonlinear Time Series Models in Empirical Finance (with Philip Hans Franses, Cambridge University Press, 2000).

Yvette Nelen | alfa
Further information:
http://www.eur.nl/english

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