Financial Policy Announcement Efficiency in Financial Crisis

Abstract

In 2008 financial crisis, stock market turned highly volatile while U.S. government had proposed a series of policies rescuing the economy. This study examines convergence to market efficiency from government financial policies. We find a significant impact of contemporaneous order imbalance on return, while the relation between return and lagged imbalances is insignificant, implying that lagged order imbalances have no predictability on return. From a time-varying GARCH model, we find that explaining power of order imbalance on return declining, implying that volatility plays an important role in return-order imbalance relation. We take a further step to find that there is no strong direct relationship between order imbalances and stock volatility. The story casts on market maker behaviors. Market makers accommodate high inventory levels to mitigate stock volatility on financial policies announcements. An imbalance based trading strategy we develop fails to beat the market. It supports financial policy announcement efficiency.