NEWS-DRIVEN MARKET REACTIONS: SHORT-TERM PRICE MOVEMENTS IN STOCK AND FOREX MARKETS

Abstract

Because of fast algorithmic trading and instant worldwide communication, today’s markets are quick to react to any news events. The paper explores the factors causing fast price fluctuations in stocks and in forex after news events. Using information from studies and research, the paper investigates the effects of macroeconomic news, geopolitical changes, central bank statements and random news on volatility and trader habits. Researchers conclude that news events have different effects on the liquidity of markets, the pattern of volatility and trading activity, despite being organized into scheduled and unscheduled categories. Studying examples of investor responses to key news such as Federal Reserve decisions and changes in unemployment or politics, this analysis points out that investors often react too quickly, too slowly or in unpredictable ways that cause volatility among asset types. Extra importance is given to understanding how HFT and sentiment analysis tools increase and clarify the impact of any market movements. From comparing data and using event-based research, it is shown that forex markets respond more rapidly but less accurately, since they have abundant liquidity and a longer operating schedule. In the conclusion, the paper outlines actions institutional investors should take and desired policies for market regulators to help markets recover from information shocks.