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Abstract
A news model of stock price determination is specified and estimated using the Kuwait Stock Exchange (KSE) index as the price variable over the period January 1996 to December 2004. Of the five explanatory news variables, only the news terms of the money supply and government revenue turned out to be significant and correctly signed. Some weaker evidence is found for the effect of the interest rate news term. The news model shows little dynamics, implying that news is reflected rather quickly on stock prices. It is also demonstrated that stock prices react to the media news and announcements, but it is not possible to measure the unanticipated components of the announcements in the absence of a proper survey of opinions.
Acknowledgements
We are grateful to Mine Cinar for extremely useful comments. We are also grateful to an anonymous referee of this journal for encouraging remarks.
Notes
1 See, for example, Cooper (Citation1974), Rozeff (Citation1974) and Rogalski and Vinso (Citation1977) on the effect of the money supply; Day (Citation1984), Fama and Schwert (Citation1977), Gultekin (Citation1983), Cochrane and DeFina (Citation1993) on the effect of inflation. The effect of economic activity, proxied by government expenditure and revenue, and the interest rate are straightforward.
2 The diagnostic test statistics SC, FF and HS are for serial correlation, functional form and heteroscedasticity, which follow a chi-square distribution with 12, one and one degrees of freedom, respectively. DW is the Durbin–Watson statistic.