8.6 DESIGNING A TRADING STRATEGY
8.6.1 Turning a dataset into a trading signal
Extracting and cleaning a news flow dataset is only the initial challenge. There are a variety of ways to incorporate this information into a trading strategy. We briefly highlight some of the issues worth considering when taking a news signal and designing an event-driven trading strategy.
8.6.2 How to define the event?
Companies may announce several different news items over the course of a month, which may either be received positively, negatively, or with a muted price reaction. Following the release of information it may be the case that the market and/or analysts initially overreact or underreact to the news. Analysts may wait for a series of confirmatory news signals over a couple of months before considering changing their forecasts. Should we react to every news item or wait for a trend in consecutive news items?
8.6.3 What is the informational content of the event?
Once we see an event, how do we systematically decide whether it is significant? The number of news items for each company are too high to regard every news report as an event. One approach could be to wait for analyst forecast changes following the news, though, as we have shown, analysts may be slow to react or reluctant to act at all. Alternatively, we can define significant news by its short-term price reaction, though the secondary issue is deciding which thresholds to use to define positive and negative news so that we do not ...