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Real-time Price Discovery via Verbal Communication: Method and Application to Fedspeak
Marco Grotteria, Roberto Gomez Cram
London Business School, United Kingdom
Discussant: John Kuong (INSEAD)
We advance the hypothesis and establish empirically that investors' expectations underreact to Central Banks' messages. From the videos of post-FOMC-meeting press conferences, we extract the words, and timestamp them at the millisecond. We align the transcripts with high-frequency data for several financial assets to provide granular evidence on the investors' expectations formation process. When the Chairman discusses the changes between current and previous policy statement, price volatility and trading volume spike dramatically, and prices move in the same direction as they did around the statement release. Our approach allows us to quantify in monetary terms the value of information rigidity.
Imprecise and Informative: Lessons from Market Reactions to Imprecise Disclosure
J. Anthony Cookson1, S. Katie Moon1, Joonki Noh2
1University of Colorado Boulder, United States of America; 2CaseWestern Reserve University, United States of America
Discussant: Giuliano Curatola (University of Siena)
Imprecise language in corporate disclosures can convey valuable information on firms’ fundamentals. We evaluate this idea by developing a linguistic imprecision measure based on sentences marked with the “weasel tag” on Wikipedia. In the 10 weeks after the 10-K disclosure, high linguistic imprecision predicts positive and non-reverting abnormal returns, improvements to stock liquidity, more insider and informed buying, and more positive news sentiment. These findings are driven by disclosures that are more forward-looking and use more R&D terms. Together, our results imply that imprecise language in 10-Ks contains new information on positive but yet immature prospects of future cash flows.