Review of Quantitative Finance and Accounting, 23: 229–250, 2004
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Stock Price Distributions and News: Evidence from
JAMES M. STEELEY
Aston Business School, Aston University, Birmingham, B4 7ET, UK, Tel: +44-121-359-3011
Abstract. We estimate the shape of the distribution of stock prices using data from options on the underlying
asset, and test whether this distribution is distorted in a systematic manner each time a particular news event occurs.
In particular we look at the response of the FTSE100 index to market wide announcements of key macroeconomic
indicators and policy variables. We show that the whole distribution of stock prices can be distorted on an event
day. The shift in distributional shape happens whether the event is characterized as an announcement occurrence or
as a measured surprise. We ﬁnd that larger surprises have proportionately greater impact, and that higher moments
are more sensitive to events however characterised.
Keywords: implied density functions, macroeconomic news, index options
JEL Classiﬁcation: G13, G14, E44, C22
In this paper, we ask whether the distribution of stock prices is inﬂuenced by new public
information. We estimate the shape of the distribution of stock prices using data from
options on the underlying asset, and test whether this distribution is distorted in a systematic
manner each time a particular news event occurs. In particular, we focus on the impact of
announcements of key macroeconomic ﬁgures on the distribution of a stock market index.
Uncovering the impact of news in the stock market has a long history. Early contributions
include Sprinkel (1964), Palmer (1970), Homa and Jaffee (1971) and Hamburger and Kochin
(1972) in the U.S.A., and Brealey (1970) and Saunders and Woodward (1976) for the U.K.
With the exception of Brealey (1970), these early studies examined the impact of changes
in the money supply on changes in the particular stock market price index. While the U.S.
studies found that money supply changes were not immediately transmitted to stock market
prices, the Saunders and Woodward study found the opposite result for the U.K. Brealey
(1970) found that the U.K. stock market took more than one day to react to news about the
More recently, studies have considered a wider range of macroeconomic surprises, re-
ﬂecting the parallel literature on the pricing of macroeconomic risk factors that commenced
with the work of Chen, Roll and Ross (1986).
Goodhart and Smith (1985) examined the
Earlier versions of this paper were presented at the conferences of the Financial Management Association in
Orlando and Edinburgh, the Royal Economic Society in St. Andrews, and the British Accounting Association in
Exeter, and also at the University of Lancaster.