Time Variation in the News-Returns Relationship

55 Pages Posted: 17 Jul 2019 Last revised: 12 Nov 2019

See all articles by Paul Glasserman

Paul Glasserman

Columbia Business School

Fulin Li

University of Chicago - Booth School of Business

Harry Mamaysky

Columbia University - Columbia Business School

Date Written: July 16, 2019

Abstract

We find that the well-documented underreaction of stock prices to news exhibits substantial time variation, and we use this time variation to investigate the nature of the underreaction. The risk-bearing capacity of financial intermediaries and the degree of passive ownership of stocks are important conditioning variables for how contemporaneous and future prices respond to news. Once we control for likely institutional trading motives, we find the surprising result that stock prices overreact to news. Changing informativeness of news explains a portion but not all of the time variation in the news-returns relationship. The particular association of entropy, a text-based measure of news informativeness, with the news-returns relationship supports our interpretation that strategic institutional trading induces persistent price moves in response to news.

Keywords: information choice; asset pricing; price efficiency; attention

JEL Classification: G14, G20, D83

Suggested Citation

Glasserman, Paul and Li, Fulin and Mamaysky, Harry, Time Variation in the News-Returns Relationship (July 16, 2019). Available at SSRN: https://ssrn.com/abstract=3420981 or http://dx.doi.org/10.2139/ssrn.3420981

Paul Glasserman

Columbia Business School ( email )

3022 Broadway
403 Uris Hall
New York, NY 10027
United States
212-854-4102 (Phone)
212-316-9180 (Fax)

Fulin Li

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Harry Mamaysky (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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