News Momentum

Michigan State Univ, Rutgers Business School & Prime Quantitative Research LLC | August 02, 2017

The authors decompose daily stock returns into news- and non-news driven components, using a comprehensive sample of intraday firm-level news arrivals matched with high-frequency movements of their stock prices.

Introduction to News Momentum White Paper

The extensive literature on return predictability has established an interesting array of facts regarding the dynamics of individual stock returns. In particular, whereas short-horizon stock returns within the past month and long-horizon returns in the past 3-5 years exhibit reversals, returns in the period of 3-12 months show a pattern of continuation in the subsequent 3-12 months. This finding on the stock price momentum has received widespread attention, and generated substantial controversy among financial economists regarding its implications for market efficiency.

In this paper, the authors exploit this insight to contribute to the literature on return predictability.

To better understand the source of the news momentum, we follow Lo and MacKinlay (1990), decomposing the expected news momentum profit into three components...

News Momentum

The authors examine the relation between news return and future stock returns. And they start with a simple news momentum strategy using univariate sorts, and then perform multivariate regressions to further assess the incremental information contained in news returns. Next, they compare the news momentum strategy with other investment strategies, such as size, value, price momentum, and short-term return reversal, and conclude this section with an analysis of transaction costs.

News Momentum and Firm Characteristics

In this subsection, the authors examine the cross-sectional determinants of the news momentum effect to shed further light on its nature. Specifically, they study whether the performance of the news momentum strategy concentrates among stocks with certain characteristics, including firm size, analyst coverage, volatility, illiquidity, and past returns.

Overnight News

In this section, the authors perform an in-depth analysis of overnight news, which has received relatively little attention in the literature. Using an intraday event study approach, they find compelling evidence for delayed reaction to overnight news, which constitutes more than half of our sample. It lends further support to underreaction as the main driver of news momentum.

News Momentum key finding

  • Consistent with prior literature, non-news returns precede a reversal.
  • For news-driven returns, there is strong evidence of return continuation without subsequent reversals.

The strategy’s profitability is driven by positive serial correlations in individual stock returns, and is particularly pronounced for overnight and weekend news and among small firms. The white paper's conclusion suggests that investor under-reaction to news, coupled with limits to arbitrage, drives news momentum.

News Momentum

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