Underreaction to News in the US Stock Market

59 Pages Posted: 19 Mar 2010 Last revised: 15 Sep 2012

Nitish Ranjan Sinha

Board of Governors of the Federal Reserve System

Date Written: August 23, 2010

Abstract

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

Sinha, Nitish Ranjan, Underreaction to News in the US Stock Market (August 23, 2010). Available at SSRN: https://ssrn.com/abstract=1572614 or http://dx.doi.org/10.2139/ssrn.1572614

Nitish Ranjan Sinha (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

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