Thursday, 3 February 2011

what's in a slide?

Jeff Ely, from the econ department at Northwestern, uses a slide from UPF doctoral candidate Peter Koudijs' job market talk to show how you should always have one chart that encapsulates everything you are trying to say in an academic presentation ...(over at cheeptalk)

The chart shows what happened to the stock price of the East India Company after Prime Minister Fox warned that the company would not be bailed out by the government (yes, they did that in those days). You can see the reaction in London on Nov. 19th and the following days. But you don't see it in Amsterdam, where the same share is traded. Why? Because the boats bringing the information didn't sail when the weather was really bad. In this chart, every vertical line shows when a boat sailed (upper panel), and when it arrived (lower panel). You can see that it took until Nov. 29 for the news to reach Amsterdam. Then, the reaction was instant. Peter weaves this into an interesting story about informational efficiency, and what we can learn about the importance of news in generating volatility (it turns out that about half of the price changes can be explained by news in this uniquely clean setup - but that leaves the other half unexplained, which Peter tackles in a nice, home-made model emphasizing asymmetric information). Now, we have to wait for those job offers to come in...

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