Stock investors may take days to distinguish real news from noise, according to Federal Reserve Bank of New York.

This is especially true these days, given false announcements of bailouts, Fed interventions and rescues. They tend to cause fake short squeezes that temporarily spike markets, only to see them ultimately head lower.

To get a closer look of noise on markets, the FFRBNY studied how UAL’s stock moved in September 2008. At the time, a “six-year-old report on the company’s bankruptcy filing appeared online and was treated as a new story.”

David Wilson of Bloomberg has the details:

“UAL, which later became United Continental Holdings Inc., plunged as much as 76 percent on Sept. 8, 2008, in response to the error. While UAL’s loss narrowed to 11 percent by the close of trading, the shares fell the next two days before rebounding.

“Residual effects attributable to the false news shock” lasted for seven trading days, the researchers wrote this week in a blog posting on the New York Fed’s website. The effect is at odds with the efficient-market hypothesis, which holds that share prices reflect all publicly available data on a company.

To identify the time period, they estimated where UAL’s shares would have traded if the outdated report hadn’t surfaced. The projection was derived from the performance of the Standard & Poor’s 500 Index, the Bloomberg World Airlines Index and crude oil during the period. The posting by economists Carlos Carvalho, Nicholas Klagge and Emanuel Moench was based on a report they published in May 2009 and revised in June. Carvalho, who teaches economics at the Pontifical Catholic University of Rio de Janeiro, worked at the New York Fed when the research was originally done. His two co- authors are still there.

Given every twitch of the market over tales of EU/ECB action, German banks bailing out Italy, or anything related to Greece, it is interesting to see how traders behave relative to false announcements.

Category: Analysts, Financial Press, Really, really bad calls, Short Selling, Trading, Web/Tech

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7 Responses to “The Impact of Phoney Short Squeezes”

  1. gordo365 says:

    Can we all agree to call it the “efficient-market NULL hypothesis”?

  2. The Pale Scot says:

    Gentle Folk and BR, what credence should one put in Robert Shapiro comments;
    “IMF advisor says we face a Worldwide Banking Meltdown” @ Zerohedge.

    “the bailout expert has pretty much said what, once again, is on everyone’s mind: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008″

    It’s the time frame I’m curious about. That the banks are still insolvent seems obvious.

  3. Futuredome says:

    “It’s the time frame I’m curious about. That the banks are still insolvent seems obvious”

    Again, what banks are insolvent? Thus, your timeframe is irrevelant. Finding out which ones are insolvent leads toward the nationalization of finance and the end of Wall Street. You have to understand the paradox in that situation for finance. Even the “weak” Dodd/Frank already made the 2008 style bailout harder.

    Thus, which banks are solvent. Which banks can pay back counterparties, which have had that burden lessen? Stuff like that is the problem with “investigative journalism”. It looks into the sensational and misses the nuts and bolts. Instead of creating a real model for unwinding.

  4. The Pale Scot,

    Denninger, FWIW, thought it important..

    Quoting..”…IMF advisor here… this is not to be ignored!…”

    further..”…Ps: Don’t buy into the BS that “it’s all ok” because we had a nice little market rally….”

  5. hammerandtong2001 says:


    It sure is.

    And I think primarily suggestive of opague, dark and non-transparent markets. Courtesy of TBTF banks which now hold world economies hostage. Because the associated “risk” is not known or measureable.

    Hence, unprecedented volatility.


  6. DrungoHazewood says:

    We just had a mistake when someone mistook ARR for AMR. S

  7. DrungoHazewood says:

    Sorry, a cat walked over the keyboard. Anyway, ARR fell 12 days in a row, then the mix up in symbols, and now its rebounded. It should now(within a few trading days) continue its decent.