Petersen, Alexander M. and Wang, Fengzhong and Havlin, Shlomo and Stanley, H. Eugene Quantitative law describing market dynamics before and after interest-rate change. Physical Review E, 81 (6). 066121. ISSN 1539-3755 (2010)
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Abstract
We study the behavior of U.S. markets both before and after U.S. Federal Open Market Commission meetings and show that the announcement of a U.S. Federal Reserve rate change causes a financial shock, where the dynamics after the announcement is described by an analog of the Omori earthquake law. We quantify the rate n(t) of aftershocks following an interest-rate change at time T and find power-law decay which scales as n(t−T)∼(t−T)−Ω, with Ω positive. Surprisingly, we find that the same law describes the rate n′(|t−T|) of “preshocks” before the interest-rate change at time T. This study quantitatively relates the size of the market response to the news which caused the shock and uncovers the presence of quantifiable preshocks. We demonstrate that the news associated with interest-rate change is responsible for causing both the anticipation before the announcement and the surprise after the announcement. We estimate the magnitude of financial news using the relative difference between the U.S. Treasury Bill and the Federal Funds effective rate. Our results are consistent with the “sign effect,” in which “bad news” has a larger impact than “good news.” Furthermore, we observe significant volatility aftershocks, confirming a “market under-reaction” that lasts at least one trading day.
| Item Type: | Article |
|---|---|
| Identification Number: | 10.1103/PhysRevE.81.066121 |
| Additional Information: | © 2010 American Physical Society |
| Uncontrolled Keywords: | PACS: 89.65.Gh, 91.30.Px, 89.75.Da, 64.60.av |
| Subjects: | H Social Sciences > HG Finance Q Science > QC Physics |
| Research Area: | Economics and Institutional Change |
| Depositing User: | Alexander Petersen |
| Date Deposited: | 04 Jul 2011 09:21 |
| Last Modified: | 18 Dec 2014 15:24 |
| URI: | http://eprints.imtlucca.it/id/eprint/270 |
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