When The Wall Street Journal needed expert help in reporting a story about possible leaks of government financial data in the United Kingdom, it turned to West Virginia University finance professor Alexander Kurov, who had recently completed a study on the same question in U.S. markets.
Kurov, an associate professor in the College of Business and Economics, did the analysis behind the article by reporter Mike Bird published Wednesday headlined “New Data Suggest U.K. Government Figures Are Getting Released Early."
The article sent shock waves throughout the U.K. and, potentially, other European markets. Now, Andrew Tyrie, a Member of Parliament from Chichester who chairs the Treasury Select Committee, has called on the U.K.’s Financial Conduct Authority to look at unusual patterns of trading behavior prior to market-moving data releases to the public.
Coverage of Kurov’s analysis is also high in multiple U.K. media outlets ranging from The Financial Times to the BBC, and the WVU professor has agreed to continue working with The Journal to complete similar analysis for other countries.
Javier Reyes, Milan Puskar Dean of the College of Business and Economics, said he thought leadership and research such as Kurov’s studies are examples of critical contributions from higher education institutions.
“Here we have one of the most recognized news outlets in the world seeking out a standout researcher from our business school,” Reyes said. “This is information that could impact markets in the U.S., the U.K. and around the world. When you have true thought leadership and research that is meaningful to the global marketplace, that is great for our business school and for West Virginia University.”
Kurov researched key economic announcements in the U.K., including industrial production, Consumer Price Index and jobless numbers.
“For these three announcements, I found evidence of ‘price drift’ in the ‘right’ direction in the one hour before the announcement in the U.K. government bond futures market," he said. "For two of these announcements, industrial production and Consumer Price Index, I found evidence that the price drift starts about 24 hours before the announcement. The price drift suggests that some traders have access to the data before it is officially released.
“The price drift is larger over a 24-hour period than the market’s reaction to the official release of information. In other words, the drift is substantial in economic terms,” he said. He added that there is a less than 1 percent chance these movements in the market were random.
A study completed last year by Kurov and his co-authors indicated similar possible leaks in the United States may have helped informed traders pocket more than $160 million. The Journal thought the same thing might be happening when it came to the release of key economic data in the United Kingdom, and Bird contacted Kurov to study potential price drift in there.
Kurov’s research and the subsequent Journal article may lead to policy changes about when important economic data is released and who has prior access. Kurov said an example to look at is the release of labor market data in the U.K. More than 100 people, including policy advisors and press officers, get the data 24 hours before the official release.
“It’s easy to imagine how the information can leak out,” he said.
He noted that such potential violations affect “price discovery,” which is the process by which asset prices get to reflect fundamental values. These practices are damaging to the markets, Kurov said, because they affect public confidence and reduce incentives to conduct proper market analysis — and that is when prices do not reflect values.
“People look for information, trade on it and the information gets reflected in prices,” Kurov said. “It is important to understand how price discovery works, because when this process breaks down we have things like price bubbles and market crashes, with resulting misallocation of resources and economic damage. For example, we all saw the aftermath of the U.S. real estate bubble and the resulting financial crisis. The same applies in this case. Markets can be adversely affected if people use leaked economic data for their own gain.”
Kurov said having the ability to answer a question for The Journal that has such a far-reaching impact was rewarding, in part because it was prompted by the previous research he had completed on the U.S. markets. That, he said, proves the real value of research.
“The message is simple: our research matters. Our job is to better understand how markets and businesses work,” said Kurov. “Once we understand that, we can come up with ideas for improvement. But first we need to understand.”
For more information on the WVU College of Business and Economics, follow B&E on Twitter at @wvucobe or visit business.wvu.edu.
Patrick Gregg, WVU College of Business and Economics