6.2 PREVIOUS WORK
6.2.1 Behavioral basis
How investors and traders respond to news is of ongoing interest in behavioral finance. Ideas of attention and repetition, well known in advertising, have been explored in previous work. There is a substantial amount of prior research in this area.
In “All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors,” Barber and Odean (2008) “confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one day returns.”
In “Stock price reaction to news and no-news: Drift and reversal after headlines,” Chan (2003) compares return patterns for stocks with and without news and finds major differences between the two sets. These persist even when earnings-related news (a traditional quant analytic) is removed. Consistent with our expectations based on investor attention, these effects are larger for smaller capitalization firms, an effect also seen in this chapter.
6.2.2 Risk management and news
News-based analytics are useful in risk management. The difference in return distributions associated with news have been used to forecast changes in beta, covariances, and volatility.
In “Does beta move with news? Firm-specific information flows and learning about profitability,” Patton and Verardo (2009) show that beta (systematic risk) of individual stocks increases ...