Media and the Stock Market

New research by the Univerity of Warwick investigates the influence of news publications (in this case the UK's Financial Times) on the stock market, and finds that a write up in a newspaper directly impacts trading volume of the stock the next day. The abstract:

Here, we exploit a large corpus of daily print issues of the Financial Times from 2nd January 2007 until 31st December 2012 to quantify the relationship between decisions taken in financial markets and developments in financial news. We find a positive correlation between the daily number of mentions of a company in the Financial Times and the daily transaction volume of a company's stock both on the day before the news is released, and on the same day as the news is released. Our results provide quantitative support for the suggestion that movements in financial markets and movements in financial news are intrinsically interlinked.

What is especially interesting is the time lapse between digital publication, print publication and a discernible change in the market. The research showed that the greatest impact rested from the print publication, not when written up online. John Authers, FT columnist looked at the research and noted: "the news continued to have an impact on the next day. As there are now many sources that should move markets more swiftly than a printed newspaper, this also implies that it was the news itself, rather than any editorial choice about publishing stories, that moved prices."  

To me, the main message is about market efficiency, and the fact there isn't any. Well some, but it is a weak form. Market efficiency, of course, suggests that markets take in all the information and prices adjust. Here, the lapse between publishing a story and the market impact suggests (for starters) that not everyone is aware at the same time. This suggests, however, that momentum trading strategies based on publication digital and print publication time differences, may produce a higher return.  

Already, many are starting to take advantage of this trading strategy based on social media trends. But, lets not forget that news agencies are often the ones to break the story, which is then propagated through other media forms. 

Next steps? Look at whether the sentiment of the article influenced trading direction. This has certainly been true in studies of google searches, and social media, which have been showed to correlate with trading direction. Is this also the case with the "neutral" news? Also, is this true of other organisations? Do less financial based news companies have less of an impact? What about broadcasting houses who comment on the markets? What about parts of the world with moderated/controlled media?

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