Relationship of Macroeconomic News Releases and Price Developments

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Posted on:Jan 3,2023

Abstract

The paper examines the effects of scheduled macroeconomic news releases on equity liquidity and prices. The paper contradicts many of the earlier research, which ones didnt reach a conclusion weather technical, fundamental or news related price developments are most influential long term. Using a linear regression model I examine the explanatory power of scheduled macroeconomic news releases over the EUR/USD currency pair. The R2 R2 of the model showcases a value of 0.96 when fitted for the period between 2015 and mid 2021, which suggests scheduled macroeconomic news played a key effect in the period when looking at EUR/USD price developments. This research suggests that the majority of price movements, when focused on long-term price developments can definitely be explained vie the scheduled macroeconomic events.

The intercept of the current regression is at -5.3, which firstly seems to be hard to intercept but when thinking about the mix of variables in the model it makes more sense. It’s not possible for all these values to be 0, hence I accept this intercept value & disregard further analysis on it as it simply shows the expected mean value of the EUR/USD variable when all X or independent variables are at 0 values.

Overall, the study contradicts many of the earlier studies and indicates that over a multi-year period the macroeconomic news events can provide immense explanatory power over foreign exchange price developments when focusing on the EUR/USD.

Introduction

Scheduled macroeconomic news are known to influence a wide range of securities. Ranging from bonds and shares to commodities or all sorts of derivatives, these news releases have an effect on overall market liquidity, spreads and prices. Depending on the expected versus released values and current macroeconomic trends, market news can be leading factors determining market directions. In addition to providing direct input about the states of economies or regions, speculators also use this information to facilitate profit achievement for proprietary trading. Central banks also often rely on data releases when determining monetary policies, hence these are largely in focus for speculators.
These so called scheduled macroeconomic news are news releases on a scheduled basis, with a fixed time and date of release, and as elaborated, may influence prices on different markets. They are often maintained & visualized via economic calendars and usually pertain to either a country or economic region. As an example, German employment rate would pertain to Germany, while European Central Bank interest rates pertain to the whole Eurozone. Investors from different sectors rely on this information when looking for investment opportunities or evaluating current portfolios. They might liquidate positions or increase stakes upon learning about this, therefore often causing sudden price movements or a widening of spread due to thin liquidity around news releases in these periods.
Macroeconomic factors or course are not just important due to their direct affect on liquidity & volatility metrics, but also because they signal the overall health of economies & facilitate speculation on future outcomes – f.e. (Lentner et al., 2022) examined the correlation between macroeconomic indicators in OECD countries & concluded countries with comparatively heavier tax systems and higher tax burdens tend to perform worse on certain macroeconomic indicators.
Now we understand the importance of such indicators from different perspectives. As there are many economic calendars available for free & most online brokerages today offer such tools for their clients, I’ll not be referring to specific calendars. Also, due to having a wide range of publication available on each or most economic news released in such fashion, I’ll restrain from discussing them in details in this paper.
What the current research focuses on is providing a crucial understanding of how these news releases influence the market overall in terms of price movements across a set of assets, with emphasis on equities and foreign exchange prices. This is ought to enhance generic understanding of the importance of these news & allow for interpretation of the relationship between market activities during news releases.

Literature review

After clarifying the scope of research, I’ll take an overview of existing literature in the topic. This is to leverage on what others already found in the topic & to facilitate building on their conclusions.
Firstly, the earlier research I consider in this study from (Nofsinger & Prucyk, 1999) examined the impact of scheduled macroeconomic news announcements on both OEX index options and individual equity option volume. They found increased trading volumes for options during news releases, but these volume increases didn’t pertain to individual equity options. Based on the findings, the paper provides information suggesting that investors are significantly hedging effects of news releases during these periods, while also indicating the use of index options to increase the leverage of their portfolios when they have private information and to protect themselves against adverse information when they do not.
(Nikkinen & Sahlström, 2001), just two years later conducted a study examining the effects of such news on stock markets. They focused on a set of factors from the U.S. and Finland as well, and the evidence suggests that implied volatility of the markets increased prior to the macroeconomic news releases while the volatility dropped after the announcements for both markets. This highlighted the interconnection between the markets and highlighted the general market sentiment as a driving factors.
In a study a few years later (Nofsinger & Prucyk, 2003) modeled the impact of 21 scheduled indicators with regards to their effect to the S&P100 via option trading. They checked volumes and implied volatility and found that, surprisingly, there was a 2 hours delay from news releases until the trading volume increased significantly. Interestingly, the volatility increase was almost instant in the research. Also, based on the evidence presented in their research, bad news tend to have a more impactful influence both on volumes and pricing.
(Graham et al., 2003), conducted a similar research nearly at the same time and looked into the relative importance of the scheduled macroeconomic indicators in the United States. In that research, they’ve found that, looking at 11 macroeconomic news from the country, not all the economic news impose similar effects on the market. The paper discloses Employment Report, NAPM (manufacturing), Producer Price Index, Import and Export Price Indices, and Employment Cost Index as the important factors, while the other 6 factors of the research had a lesser effect on market prices and volatility.
I would like to stop here and clarify that based on the current political situation it differs periodically what market participates and investors deem more important. With that said, I’ll continue the review of literature, especially as this paper focuses on the generic principle these news impose on the markets, not on the discussion of individual factors.
Further building on (Nikkinen & Sahlström, 2004), but in this case focusing on the European markets, I bring another paper from this author to into the discussion. They compared whether investors on European stock markets regard news announcements about domestic and US macroeconomic variables as an important source of information when valuing stocks. The study focused on German and Finnish stock markets this time, and looked into how US employment report and the Federal Open Market Committee (FOMC) meeting days have a significant impact on implied volatility on both European markets. The domestic news announcements have no effect on implied volatility on either of the markets. This suggested the importance of US macroeconomic releases mostly.
In a later study (Nikkinen et al., 2006) studied how the stock markets react to U.S. macroeconomic news releases. By using a GARCH model, they investigated 10 important news releases on 35 stocks and concluded that G7 countries, the European countries other than G7 countries, developed Asian countries and emerging Asian countries are closely integrated with respect to the U.S. macroeconomic news.
The next study focuses on the forex markets. I consider forex market related studies to be important for stock valuations & volatility as well due to the nature of how stocks are quoted. As they are denominated in currencies, the price of currencies will have a direct effect on equity prices as well.
(Mikka, 2009) conducted research with the aim to create a productive and easy-to-use forex currency trading strategy. The theory consisted of four parts: forex market, which factors affect exchange rates, how technical analysis can be used to predict exchange rate movements, and money management. The tested trading methodology achieved good results for the first two weeks but experienced losses after. The paper also notes a period with significant price movements without major economic news releases, hence raising questions about the possibility of big price movements without such factors occurring at the time.
(Jiang et al., 2012) focused on price movements and volatility. In their study, they studied the U.S. and European news releases and the volatility effects for stock markets. They examined implied volatility indices with daily frequency data and found significant implied volatility spillovers between United States and European markets. They also observed a sharp contrast in the effect of scheduled versus unscheduled news releases. As their paper notes, “Scheduled (unscheduled) news releases resolve (create) information uncertainty, leading to a decrease (increase) in implied volatility. “ They also noted news announcements do not fully explain the volatility spillovers, but the news certainly influence the amount of spillover. As per their abstract, their paper provide evidence of volatility contagion across markets.
Another study (Kadiri & Alabi, 2014) took a different perspective when further investigating the forex market. In their paper, it is apparent different market participants and traders take different shots from different perspectives, with some being more focused on fundamental or economic events, while the other group more inclined to use technical analysis as a foundation of investment decisions. As per the research, forex traders highlighted multiple psychological motives actions based on technical analysis:
– MACD,
– Moving Average,
– Price Partherns,
– Trend Line,
– Price Actions
– Volitilies.
On the contrary, a different group of financial journalists were more in support of fundamental analysis and news events. As a conclusion, the paper recommended that traders should follow fundamental and technical analysis simultaneously.
(Abednego et al., 2018) built forex trading bots to further examine the effect of news and compare them with the capabilities of technical analysis. They used scheduled economic data releases from forexfactory along with a forex trading robot using those news releases to open/close trades. The other robot in the study, referred to as technical robot worked based on the crossing of Moving Average. This robot uses 50 MA as the fast MA period and 100 MA as the slow MA period. The principle in the study was buying when the 50 MA is above the 100 MA and conversely, is to keep on selling when 100 MA is above the 50 MA. This robot used a trailing stop. They found that the yield curve of the technical robot was more stable, indicating it was easier to replicate results and build strategy. As stated, the fundamental robot used is robot doesn’t understand the outcome of these news event but rather the way a market reacts based on the outcome.
New studies also indicate the importance of sustainability factors. (Lentner et al., 2022) recently studied the effect of central bank programs & takes note on the ongoing food and energy crisis and proposes possible policies and green investment programs. This adds another piece to the puzzle right between technical and fundamental analysis techniques, which is the role of policies.
Based on the literature so far, most price developments either relate to technical or fundamental analysis. The study published by (Jan & Gopalaswamy, 2019) quantitatively conducted fundamental analysis of statistically oriented regression models, using ordinary least square regression estimate the value of the dependent variable AUD/USD. The study concluded that “only Australian economic data” or “only the US economic data” couldn’t fully reflect the trend of AUD/USD. It also notes importance of regional data, by noting that 6-month Australian interest rate itself affects AUD/USD trend much more than the six-month interest difference between AUD and USD.
Synthesis
Based on the literature it is strongly suggested that scheduled economic news drive major price developments – f.e.: from (Nofsinger & Prucyk, 1999), (Nikkinen & Sahlström, 2001), (Nofsinger & Prucyk, 2003), (Graham et al., 2003), (Nikkinen & Sahlström, 2004), (Nikkinen et al., 2006). These papers indicated that economic news influence price movements over continents & different markets at the same time making it extremely visibly how these factors can easily play a key role in equity valuations.
There are other papers though that suggested a bit differently, f.e. (Mikka, 2009). The paper provided evidence on a relatively significant price movement without major economic news released at the given time.
In a different study (Kadiri & Alabi, 2014) said the overall market volatility also depends greatly on the type of news (scheduled vs. unscheduled), with scheduled news releases resolving information uncertainty & leading to a decrease in implied volatility, while unscheduled news releases creating information uncertainty, leading to increase in implied volatility.
Based on the studies, different news can potentially cause different market reaction while traders also follow a set of technical and fundamental analysis methods to determine future price movements. (Abednego et al., 2018) came close to this conclusion when comparing fundamental and technical trading algorithms, but I find it important to clarify that the fundamental robot didn’t have the capability to interpret the market news in context. As we’ve seen in different studies before, scheduled news definitely have a cross-market impact as proved via literatures & the interpretation of such news in my opinion has to do a lot with current economic and political situation as well, therefore making it in my opinion a questionable result. This theory on cross-market impact is also backed by (Jan & Gopalaswamy, 2019), who noted that 6 month Australian interest rate itself affects AUD/USD trend much more than the six-month interest difference between AUD and USD, while also highlighting no single country’s economic news could fully explain price developments.
Summarizing the literature review it seems visible that the overall equity and foreign exchange markets are jointly influenced by factors such as scheduled and unscheduled economic news, technical indicators. Some of the discussed studies also highlighted the opportunity for sudden price movements without significant economic information releases.
We learned little though about the exact effect of the scheduled news releases in terms of additional volatility. On top, many of the research suggests different news tend to bear importance in different times – which of course is logical due to the mentioned economic and political situation & whether the released value of the scheduled news can be considered as a surprise to the market. In the following section I try to quantify the effect of the economic news on the EUR/USD forex pair over the past period to provide a comprehensive overview of news importance.
Research model & evaluation of data
For the purpose of this research, I’ve also gathered data from the forexfactory.com website & stored the actual values of scheduled economic events between 2015 and mid-2021. This includes a wide range of indicators ranging from interest rates decisions to building permits or employment rates. I didn’t constrain the number of macroeconomic news, so the database contains everything that was published & uploaded to the mentioned website in this time range. A graph of the indicators can be seen below.
As the indicators shown on graph 1 tend to move in very different ranges, and their numbers makes it difficult to create a meaningful representation, for the purposes of this study I’m also consolidating them in a table format, enabling the reader to have a more concise and easy-to-read view on the specific metrics used for modeling inputs.

This research suggests that the majority of price movements, when focused on long-term price developments can definitely be explained vie the scheduled macroeconomic events.
The intercept of the current regression is at -5.3, which firstly seems to be hard to intercept but when thinking about the mix of variables in the model it makes more sense. It’s not possible for all these values to be 0, hence I accept this intercept value & disregard further analysis on it as it simply shows the expected mean value of the EUR/USD variable when all X or independent variables are at 0 values.
Overall, the study contradicts many of the earlier studies and indicates that over a multi-year period the macroeconomic news events can provide immense explanatory power over foreign exchange price developments when focusing on the EUR/USD.

References

Csaba, Lentner – Zsolt, Horbulak – Sándor, Zsarnóczai J. (2022): The Role of the Importance of Environmental Sustainability in the Period after 2020, ECONOMICS & WORKING CAPITAL 2022 : 1-2 pp. 76-80., 5 p.
Engr, K. O. Kadiri – O. A. Alabim, (2014): Importance of Technical and Fundamental Analysis in the Foreign Exchange Market, DOI: 10.9734/BJEMT/2015/10735
George, J. Jiang – Eirini, Konstantinidi – George, Skiadopoulos (2012): Volatility spillovers and the effect of news announcements, Journal of Banking & Finance, Pages 2260-2273, ISSN 0378-4266
Graham, M. – Nikkinen, J. – Sahlström, P. (2003): Relative importance of scheduled macroeconomic news for stock market investors. J Econ Finan 27, 153–165 (2003). https://doi.org/10.1007/BF02827216
Jan, J.-h. – Gopalaswamy, A.K. (2019): „Identifying factors in currency exchange rate estimation: a study on AUD against USD”, Journal of Advances in Management Research, Vol. 16 No. 4, pp. 436-452. https://doi.org/10.1108/JAMR-09-2018-0084
John, Nofsinger – Brian, Prucyk, (2003): Option volume and volatility response to scheduled economic news releases, https://doi.org/10.1002/fut.10064
Jussi, Nikkinen – Mohammed, Omran – Petri, Sahlström – Janne, Äijö (2006): Global stock market reactions to scheduled U.S. macroeconomic news announcements, Global Finance Journal, https://doi.org/10.1016/j.gfj.2006.06.003.
Jussi, Nikkinen – Petri, Sahlström (2004): Scheduled domestic and US macroeconomic news and stock valuation in Europe, Journal of Multinational Financial Management, Volume 14, Issue 3, https://doi.org/10.1016/j.mulfin.2003.01.001.
Lentner, Csaba – Hegedűs, Szilárd – Nagy, Vitéz (2022): Correlations of Taxation and Macroeconomic Indicators in the OECD Member Countries from 2014 to the First Year of the Crisis Caused by COVID-19, JOURNAL OF RISK AND FINANCIAL MANAGEMENT 15 : 10 Paper: 464, 17 p.
Luciana, Abednego – Cecilia, Esti Nugraheni – Irvan, Rinaldy (2018): Forex Trading Robot with Technical and Fundamental Analysis, doi: 10.17706/jcp.13.9.1089-1097
Miikka, Linden (2009): Technical Analysis in Forex : A Strategy for Individual Trader in Intra-Day Trading, Haaga-Helia University of Applied Sciences
Nikkinen, Jussi – Sahlström, Petri (2001): Impact of Scheduled U.S. Macroeconomic News on Stock Market Uncertainty: A Multinational Perspecive (July 7, 2015). Multinational Finance Journal, Vol. 5, No. 2, p. 129-148, 2001, Available at SSRN: https://ssrn.com/abstract=2627625
Nofsinger, John R. – Prucyk, Brian R. (1999): Option Volume and Volatility Response to Scheduled Economic News Releases: Evidence of Informed Trading (April 1999). Available at SSRN: https://ssrn.com/abstract=160494 or http://dx.doi.org/10.2139/ssrn.160494
SKLearn Python library website, 2023, https://scikit-learn.org/stable/modules/generated/sklearn.linear_model.LinearRegression.html

Ádám Suhajda, PhD Student
Doctoral School of Management
and Business Administration,
Hungarian University of Agriculture and Life Sciences