We’ve had our run-ins here on FT Alphaville with “false news” – or rather examples where some people fail to understand a post and therefore trade on false assumptions.
In jittery markets especially, some participants feel the urge to deal before engaging brain, leading to what researchers at the New York Fed now term “false news shock.”
The big example, of course, came last September with the “re-bankruptcy” of United Airlines. A six-year old article about the 2002 bankruptcy of UA’s parent was republished on the web, leading some to believe the airline was again insolvent. The price momentarily dropped 76 per cent in panicked trade.
Carlos Carvalho and two colleagues at the Fed have now applied a simple asset-pricing model to study the aftermath of this particular false news shock, which found that it took six trading sessions before the price normalised. The incident also had a persistent effect on the stock prices of other major airlines at the time.
Foolishness, it seems, will forever undermine efficient markets.