How the Equity Market Responds to Unanticipated Events

One of the major premises of efficient market theory is that the market quickly impounds any publicly available information, including macroeconomic information, that might be used to predict stock prices. It is only new—and especially new and unpredictable—information that moves prices, and yet many studies examine only announcements that have a predictable component. Researchers typically select a proxy for the anticipated portion of the news announcement and then test the market’s reaction to the unanticipated portion of the announcement. However, the process of separating the anticipated and unanticipated portions of news announcements is critical to conclusions that can be drawn about price changes, the speed of adjustment, and trading activities. We avoid this separation problem by looking at fully unanticipated events.