What is “News”? What is an “Event study”? China Edition

Remarks by a reader indicate it’s worthwhile to recap this topic. Consider:

If markets are informationally efficient, corporate news events such as earnings announcements should be immediately reflected in stock prices. Now, actually checking stock-price reactions to corporate events is also not as straightforward as it sounds. But Gene and his coauthors provided the standard solution to all of the empirical difficulties that survive to this day. The immense event-study literature followed, allowing academic accounting to measure the effect of corporate events by the associated stock price movements.

If markets are informationally efficient, corporate news events such as earnings announcements should be immediately reflected in stock prices. Now, actually checking stock-price reactions to corporate events is also not as straightforward as it sounds. But Gene and his coauthors provided the standard solution to all of the empirical difficulties that survive to this day. The immense event-study literature followed, allowing academic accounting to measure the effect of corporate events by the associated stock price movements.

This is from a discussion of Fama’s contributions. And what is an event study? From Investopedia:

An event study is an empirical analysis that examines the impact of a significant catalyst occurrence or contingent event on the value of a security, such as company stock.

Now consider these comments in response to this post:

No update? The Shanghai Composite, USD:Yuan, and Hong Kong Index each recouped these relatively modest (e.g. Shanghai was only ~-2% and HK ~-3.8%) Nov 27 losses.

It’s also important to note that Menzie’s cherry-picked data sample magnifies the shock-value of recent (transitory) losses. The same datasets viewed from merely a month back would’ve shown this week’s declines as nothing much more than returns to recent levels.

Always beware economists ringing alarms.

Here is the updated graph for the Shanghai composite:

Figure 1: Shanghai 30 index.

The event I focused in on my 27 November post on is shown in the red circle is what I focused in. The point was the outbreak of widespread protests, as “news”, as shown in one-week-detail below:

Figure 2: Red circle denotes response to protests.

For an example of the application of the concept of “news” in efficient markets, see this post.

The reader brings out attention to the recouping of losses on Tuesday (local time). However, it’s not as if nothing happened on Tuesday. Rather, as indicated in the WSJ:

Hong Kong’s benchmark Hang Seng Index jumped 5.2% on Tuesday, ending on a high after China’s national health authority talked down the risks of the Omicron variant of the coronavirus and said it would increase vaccinations for the elderly.

The move shows the government is still refining its approach to Covid-19, one of the biggest concerns of global investors. China’s strict Covid-19 policies recently fueled protests across the country, something that was partly to blame for falling markets in both Hong Kong and the U.S. on Monday.

Tuesday’s rally was also helped by a move by China’s securities regulator to loosen restrictions on property companies raising equity funding in its domestic market, a source of capital they haven’t had access to for years, said strategists. Chinese developer Longfor was among the best performers, rising more than 11% in Hong Kong.

China’s CSI 300 index rose 3.1% Tuesday, while the Shanghai Composite increased 2.3%.

This is shown in the green rectangle in the figure below:

Figure 3: Green rectangle denotes government policy measures to support real estate sector, increased vaccination for elderly.

In other words, not all else was held constant on Tuesday.

I didn’t think I’d need to explain this concept, but apparently I do. Here is an earlier application of the “news” concept (again China-related, but this time hogs).

 

Addendum:

According to Han and Kong (2020), the standard deviation of Shanghai stock price is 1.6% (2001-2020).