News and Google Hits: A Path to 20% Alpha?

December 9, 2012 Architect Academic Insights
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Media and Google: The Impact of Information Supply and Demand on Stock Returns

by Yanbo Wang

Yanbo identifies information into two buckets: News releases (supply) and Google search traffic (demand). A very rough synthesis of how the supply and demand are predicted to affect stock returns works as follows:

  1. Increased supply, with increase in demand ==> No effect
  2. Increase in demand, no increase in supply ==> No effect
  3. Increase in supply AND increase in demand ==> Strap on your alpha rockets

 

I use the number of news articles and Google search volume about a company as proxies for the information supply and demand respectively. I examine the relationship between the cross sectional stock return and the “pairs” of information supply and demand shifts. I show that only the upward shift in both information supply and demand is an economically and statistically significant predictor of future returns among shift “pairs”. A monthly rebalanced portfolio to buy stocks with this shift “pair” and short sell the other stocks delivers an abnormal return between 16% and 22% per year with a sharp ratio between 0.85 and 0.9 (S&P500 sharp ratio is 0.049 in the same period). The abnormal return increases to 23%-34% per year in the small stocks subsample. This finding shows that the supply of information affects stock return only when there is a demand for information. The result is consistent with attention hypothesis and supports the approach to tackle both information supply and demand jointly. To my knowledge, this is the first empirical paper to study the joint effect of both information supply and demand on stock returns.

Finance porn:

First, the overall results.

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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Next, some results specific to smaller stocks. 2.25% per month 4-factor alpha?

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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.



About the Author

Wesley R. Gray, Ph.D.

Dr. Gray has been an active participant in financial markets for over 15 years. His experience includes positions as a Captain in the United States Marine Corps, as a finance professor at Drexel University, and as a portfolio manager for a special-situations hedge fund. Education and entrepreneurship has been the focus of his professional endeavors and his research interests are focused on the performance of portfolio managers and behavioral finance. Dr. Gray is currently the Executive Managing Member of Alpha Architect, an SEC-Registered Investment Advisor. Dr. Gray has published two books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army and QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. His work has been highlighted on CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.