Enhancing Trader Performance: Does Headline News Matter?

BellaGeneral CommentsLeave a Comment

Every day we see the financial media outlets attempt to explain the day’s market action, usually with a headline pointing to a particular event or supposed market moving event that details THE reason the market moved in one direction or the other. The headlines often change from open to close depending upon the day’s action, as the market can be up for one reason in the morning and down for another by the afternoon.  Traders, in their quest to find an edge, will often attempt to trade the news, believing that bullish news one day should lead the market higher the next. However, our logical beliefs about how the market should or should not react to news is often incorrect.  Even individual stock news can be frustratingly difficult to interpret.  For example, one company may “blow out” earnings numbers and see it’s stock tank, while another may report horrific numbers and guide lower, only to have its stock gap higher.  Of course, there is usually a headline to explain this action also…after the fact.  Seasoned traders know that common logic is neither common or logical in the markets; therefore, an awareness of such must be part of any trader’s process. The following articles discuss how news affects stock prices and how we may attempt to manage our reaction to the news.

“In general, it’s been found that while news releases result in a rapid increase in volatility, the majority of the effect is relatively short-lived and subsides within the first minute.”

“This paper estimates the fraction of the variance in aggregate stock returns that can be attributed to various kinds of news.”

“Is there a predictable difference between stock returns after public news announcements and returns after large price movements, but no public news?”

“More often than not, stock prices are affected by a number of factors and events, some of which influence stock prices directly and others that do so indirectly.”

“With the large increase in the amount of daily news content on companies over the past decade, it should be no surprise that the finance literature has turned to textual analysis as one way to understand how information both arrives to the marketplace and relates to stock prices of the relevant companies.”

A large body of evidence suggests that at certain times investors under-react to information contained in stock returns and at other times overreact.”

“As news events affect human decisions and the volatility of stock prices is influenced by human trading, it is reasonable to say that events can influence the stock market.”

 I am looking forward to tomorrow’s headlines. 

David Blair


*no relevant positions

Leave a Reply