IANAE (that’s I am not a person with severe physics envy but who is compensated for this fact by earning a higher salary than a physicist), but I do not understand Brad DeLong:
Traders! Read the second page of the statistical release before you press the button!
Meredith Beechey…and Jonathan Wright have details:FRB: FEDS paper 2007-5: “Rounding and the Impact of News: A Simple Test of Market Rationality”:
Abstract: Certain prominent scheduled macroeconomic news releases contain a rounded number on the first page of the release that is widely cited by newswires and the press, and a more precise number in the text of the release. The whole release comes out at once. We propose a simple test of whether markets are paying attention to the rounded or unrounded numbers by studying the high-frequency market reaction to such news announcements. In the case of inflation releases, we find evidence that markets systematically ignore some of the information in the unrounded number. This is most pronounced for core CPI, a prominent release for which the rounding in the headline number is large relative to the information content of the release.
If the market is only reacting to the rounded number, why should a trader pay attention to the unrounded number? Is this just a case of sipping at the cooler of the efficient market hypothesis (i.e. surely the market will eventually revert to the unrounded number.) Or am I missing something?
Yes Oscar, I understand that. But from a trader’s point of view it isn’t less accurate: the market reacts more closely to the unrounded number, so while this may bug an economist, from a traders perspective, since this how the market responds, why should the trader care?
maybe, if nothing else, the next random jump will be closer to the actual value than the rounded value?
He is pointing out that the market is preferentially choosing the _less accurate_ measure of the economy as the measure to react to. This is sort of like an engineer deciding to use ‘three and a smidge’ in his or her calculations instead of 3.14159265358979323846…..
It has been my experience as a trader for the past 30 years to wait for the news release, gloss over it for a millisecond, and make a very quick trading decision based off the news. If one is faster at the gun, one can hit the inside bid or offer and be first in the position. However, the market is a strange mistress, sometimes acting what one might think “irrational. Case in point….when cocoa stock report came out at an all time high(seemingly bearish), and the market still went limit up. It’s more important to watch how the market reacts to news, not the news reaction. Psychology of the herd changes, and the market adapts to the psychological changes. The oil market’s recent action is a perfect example of this shift. Last week, with the invasion of Georgia and the near bombing of a big oil pipeline, the oil market yawned and went down a couple of bucks. A mere six weeks ago, the oil market would have probably went up a good $4-6 on the news.
Jeff