Informational Impact of Announcements

This overview is based on the academic paper entitled “Surprise and dispersion: informational impact of USDA announcements”, authored by Adrian Fernandez-Perez, Bart Frijns, Ivan Indriawan and Alireza Tourani-Rad, and is published in Agricultural Economics

When important information is released into financial markets, prices respond to reflect the information from the announcement. This reaction keeps markets efficient and ensures that prices are correct. However, some investors are more informed than others, and at times of announcements, these more informed traders can exploit their informational advantage to make financial gain. This inside edge is more important with prescheduled news announcements, as there is no uncertainty of the announcement time, only about the content. As such, informed traders can trade ahead of the announcement and make a profit.

In this study, we look at a case where informed traders can exploit their informational advantage. Our results show some degree of informed trading in agricultural commodities around the US Department of Agriculture announcements. These announcements have consistent release time and contain price-relevant information about farming goods

We observe informed trading both before and after the announcement, suggesting that some investors possess value-relevant information before it is announced, while others are ready to trade as soon as the news is released. What is interesting is that the higher the uncertainty before the announcement, the higher the informed trading activity. This shows that when disagreement about the content of the upcoming announcement is high, traders with access to private information will be more active. This observation also implies that investors engage in collecting private information when they know that others are uncertain about the announcement content.

One of the main findings of this paper is that informed trading is related to the information environment surrounding a major news event. Collecting private information can be costly and investors only engage in the gathering of private information when they know that it will give them a competitive advantage. Although our study focuses on agricultural commodities specifically, our results can be linked to other markets and assets. This analysis can provide guidance to investors and regulators, as it highlights the type of market events that would be sensitive to informed trading.