Underreaction to News in the US Stock Market
59 Pages Posted: 19 Mar 2010 Last revised: 15 Sep 2012
Date Written: August 23, 2010
Using a score provided by Thomson Reuters to measure the tone of news articles, I construct a weekly measure of qualitative information. The measure predicts future returns over the next 13 weeks and mitigates short-term reversal in the weekly momentum strategy. A portfolio that takes a long position in stocks with a past positive tone and a short position in stocks with a past negative tone has an average return of 16.54 basis points per week (8.60% per year). The findings suggest the market underreacts to information contained in news articles. The underreaction is not constrained to small stocks, low analyst-coverage stocks, low institutional ownership, or loser stocks. Unlike the weekly momentum portfolio, the underreaction portfolio does not suffer from short-term reversal.
Keywords: Asset Pricing, Underreaction, Momentum, News, Text Analysis
JEL Classification: G12, G14
Suggested Citation: Suggested Citation