Daily Academic Alpha: Misreaction to News Releases
Have you ever read a news release, thinking you’d see the stock jump 5%, but instead the stock drops 5%?
- Headline: Apple finds 10,000 pounds of platinum bars in their basement.
- Stock Reaction: Apple down 10%
Now, the example above is extreme, but according to a recent paper, market misreaction to news is not as rare as one would expect.
Using a large dataset of news releases, we study instances of investors’ mistaken reaction, or misreaction, to news. We define misreaction as stock prices moving in the direction opposite to the news when it is released. We find that news tone predicts returns in the cross-section only upon the occurrence of misreaction. Stocks that are larger, more liquid, more visible, and more covered, by analysts or by the media, are less likely to exhibit misreaction. On the other hand, the ambiguity and complexity of news content, and variables that proxy for investor distraction, are all associated with more misreaction and greater predictability.
Here are the core results from the paper:
High represents portfolios sorted on positive news tone. These portfolios tends to do better than portfolios that have negative news tone. It is a bit odd that the results for the full-sample don’t hold up for value-weighted portfolios, which likely means there is a strong element of size/liquidity potentially driving the results (even though the regressions are supposed to control for this).
Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)