How do news effect financial market - Essay Example

The main aim of this paper is to determine whether news affect the performance of financial markets whilst using data from the UK economy. Indisputably, financial markets are fundamental within specific economies as well as the global economy. Through financial markets, various economies can estimate their performances. As a result, any volatility experienced within the financial markets should be identified, tested, and controlled. One of the factors that cause volatility within financial markets is the news.

News, irrespective of its nature (good or bad), affects the performance of financial markets within the global economy, which consequently affects the operation of other markets and sectors of the individual economies. Identifying the macroeconomic variables associated with financial markets is an important step in analyzing the impact of news on the performance of financial markets (Tetlock, 2007). Amongst the identified macroeconomic variables in the UK include manufacturing index, oil prices, housing index, UK inflation, unemployment, LIBOR rates, long term interest rates, industrial index, service index, and output expectation.

Understanding the behavior of these macroeconomic variables within a financial market as a result of changes in news is likely to assist in the overall understanding of the overall impact of news on financial markets (Roley & Troll, 2003). The methodology used by Ewing (2002) in finding the impact of macroeconomic news on the returns of financial companies shall be broadly adopted in this paper with various changes and modifications to suit the specific research question. The reason for choosing Ewing’s (2002) paper is that it provides a clear understanding on the regression analysis between macroeconomic news and returns of financial companies.

Financial companies directly deal with products of the financial markets. In addition, macroeconomic news is a form of news that this paper can