Title: Financial markets' reactions to the Greek crisis' policy response: A behavioural finance approach
Authors: Simon Ganem - LSE (France) [presenting]
Abstract: The purpose is to investigate the reaction of sovereign Greek spreads to the policy response to the Greek crisis between January 2010 and Mario Draghi's July 2012 ``whatever it takes'' speech. In particular, we try to determine to what extent financial markets behaved efficiently during those crisis times. In order to do so, we have constructed a dataset of thousands of manually coded news items. Manually coding news has allowed us to differentiate between expected and non-expected news as well as minimise the endogeneity bias that can undermine the reliability of existing econometric results. The analysis of daily data, through different econometric approaches, from standard OLS to event study or quantile regressions, would suggest that financial markets did not (entirely) react in an efficient manner to policy developments. Overall, markets were more sensitive to negative than positive news when all types of news were considered (decisions, rumours, media reports, statements). When looking at a more disaggregated level of analysis, our findings show that markets reacted only to unexpected decisions when positive in line with efficiency predictions. In the meantime, rumours, media reports, statements as well as expected decisions had an impact when negative, more in line with behavioural predictions.