The Persistent Effects of a False News Shock

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines’ parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company’s stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company’s stock was still trading below the twostandard-deviation confidence band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at exactly the level predicted by the asset-pricing model. We also document that the false news shock had a persistent effect on the stock prices of other major airline companies. Key words: false news, natural experiment, United Airlines, noise, market efficiency Carvalho: Federal Reserve Bank of New York (e-mail: carlos.carvalho@ny.frb.org). Klagge: Federal Reserve Bank of New York (e-mail: nicholas.klagge@ny.frb.org). Moench: Federal Reserve Bank of New York (e-mail: emanuel.moench@ny.frb.org). The authors thank Tobias Adrian, Gara Afonso, Pérsio Arida, Markus Brunnermeier, Gauti Eggertson, Harrison Hong, Gur Hurberman, Thomas Mertens, Ricardo Reis, Asani Sarkar, Dick Startz, and Paul Tetlock for comments and suggestions. Casidhe Horan provided excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. 1 Introduction A central question of nancial economics is whether markets are e¢ cient. Among other things, market e¢ ciency requires that asset prices react to news about fundamentals, as opposed to noise. However, in most circumstances relevant information and noise arise simultaneously, and cannot be easily separated. Agents have to make inference about fundamentals from possibly noisy pieces of information, and thus the noise component usually a¤ects agents investment decisions. In this paper we explore a natural experiment that allows us to study a stock markets reaction to an information release for which the noise component could be singled out very easily. On September 8, 2008, an old article about the 2002 bankruptcy of United Airlinesparent company (henceforth UA) resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy ling by the company.1 This caused the companys stock price to drop by up to 76% in just a few minutes, before NASDAQ halted trading. After the false news had been identied as such, the stock price rebounded, but still ended the day 11.2% below the previous close. Trading volumes skyrocketed during these extreme price movements. The episode can be thought of as comprising two pieces of information: the news that UA had led for bankruptcy protection again, and the subsequent statements by UA and the media companies involved in the articles release clarifying that it pertained to the 2002 bankruptcy ling. The clarication statements were widely circulated shortly after the large price drop, and were publicly available when trading resumed. Moreover, the false news appears to have made its way to the main sources of nancial information by sheer accident. This justies our assumption that the episode provides a natural experiment to study the e¤ects of what we refer to as a false news shock : two pieces of information that cancel each other. Given this shock, we are left with the task of trying to make sense of the 11.2% drop of UAs stock price on that day and its slow recovery on subsequent days. In order to study the impact of the false news shock on UAs stock price, we need a so-called counterfactual: the path that the stock price would likely have followed in the absence of the false news. In Section 3 we construct such a counterfactual path using a simple factor pricing model for UAs stock return. In particular, we postulate that the excess return on UA stock depends linearly on the excess returns of three factors: the market(as proxied by the S&P 500), the airline industry (as proxied by Bloombergs World Airline Index), and crude oil. We estimate the asset-pricing model using data until the day before the false news impacted the market. The model captures the dynamics of UA excess returns quite well, explaining about 40% of its variation at both daily and intraday frequencies. We use our model to construct point estimates and condence intervals for UAs stock Although the article referred to United Airlinesparent company (UAL Corp.), throughout the paper we refer to the episode as pertaining to United Airlines. UAL Corp. is traded at NASDAQ under the ticker symbol UAUA.