This paper examines intraday futures market behaviour around major scheduled macroeconomic information announcements on the Sydney Futures Exchange (SFE). Prior literature analysing intraday price behaviour around announcements is extended to trading volume and quoted bid–ask spreads. The analysis of price volatility, trading volume and quoted bid–ask spreads indicates that the majority of adjustment to new information occurs rapidly, within 240 seconds of the scheduled time for major announcements, with some evidence of abnormal activity prior to announcements. Analysis of quoted bid–ask spreads suggests that they significantly widen in the 20 seconds prior to announcements and remain significantly wider for 30 seconds following announcements. The increase in quoted spreads is related to both expected and unexpected volatility, implying that market participants increase quoted spreads around information announcements as a consequence of adverse selection costs.
This paper examines intraday market behaviour around major scheduled information announcements on the Sydney Futures Exchange (SFE). Prior literature on how futures markets process information around macroeconomic announcements on an intraday basis has examined volatility and returns in US and London futures markets (see Ederington and Lee, 1993, Ederington and Lee, 1995, Crain and Lee, 1995, Leng, 1996 and Becker et al., 1996).1Ederington and Lee (1993) find that the bulk of price adjustment occurs within the first minute following major releases, with volatility substantially higher than normal for approximately fifteen minutes and slightly elevated for several hours. Ederington and Lee (1995) find that the price adjustment is rapid and basically complete within 40 seconds of the release. Leng (1996) finds that the impact of major announcements lasts for at least an hour whereas the impact of minor announcements is relatively short lived. Crain and Lee (1995) also find that most of the price adjustment occurs within the first hour, with some evidence that volatility remains higher than normal for several hours. Prior literature concerning intraday market adjustment around announcements has been limited to analysis of price behaviour. In this paper, intraday price behaviour around major macroeconomic announcements is re-examined for the SFE. This analysis is also extended to trading volume and quoted bid–ask spreads in order to more completely examine market behaviour around major announcements. While no prior research has examined intraday trading volume and quoted bid–ask spreads in futures markets, research concerning these variables in the US treasury (cash) market and around stock specific information releases has yielded additional insight into market adjustment processes (e.g. Morse, 1981, Jennings, 1994 and Fleming and Remolona, 1999).
There are a number of methodological refinements implemented in re-examining trading behaviour around major macroeconomic announcements on the Australian market. First, Ederington and Lee (1993); Crain and Lee (1995) and Leng (1996) find that information releases with the greatest impact in the US are those occurring at 8:30 am Eastern Time, 10 minutes following market opening. Although these releases consist of some of the major US announcements, it is difficult to distinguish the effects of market opening from the impact of information announcements.2 The SFE allows a cleaner intraday experiment as macroeconomic announcements generally occur at 11:30 am, almost two hours after the market opening at 9:50 am. Further, prior US studies have focussed on foreign exchange and interest rate futures.3 This paper extends this research to stock index futures, specifically the Share Price Index (SPI) futures contract traded on the SFE.
According to Smith and Whaley (1994), US futures exchanges do not collect bid and ask quotes. In addition, US ‘time and sales’ data available to researchers is essentially a list of price changing transactions, which does not include trade volume. In contrast, price reporting practices on the SFE produce a more comprehensive dataset that includes bid and ask quotes and trade volume. Access to trade volume data allows an extension of Crain and Lee’s (1995) analysis of daily trading volume to an intraday level. Also, the availability of bid and ask quotes allows an examination of intraday patterns in quoted bid–ask spreads and the construction of volatility metrics purged of biases induced by bid–ask bounce (see Venkatesh, 1992). McInish and Wood (1992) conjecture that intraday patterns in bid–ask spreads may reflect resolution of risk over the trading day not captured by volatility and volume. This analysis is also important as bid–ask spreads are an important component of transaction costs. 4
The remainder of this paper is structured as follows. In Section 2, a description of the data, sampling, and institutional detail of the SFE is presented and in Section 3, the analysis of price adjustment around information announcements is presented. In Section 4, the analysis of trading activity and quoted bid–ask spreads is presented. Section 5 provides a summary and suggestions for future research.
