Seminar: Werner Antweiler, University of British Columbia.

Title: Do U.S. Stock Markets Typically Overreact to Corporate News Stories?.

Abstract:

It is widely believed that once news is made public the information is fully reflected in prices within at most a day or two (“the efficient market hypothesis”). We test this idea using the set of over 250,000 Wall Street Journal corporate news stories from 1973 to 2001. Using computational linguistics methods we classify the stories according to topic, and for each topic with a sufficient number of identified events, we run an event study. Our results challenge the notion that stock prices reflect news immediately and consistenly. 1. On average there is a reversal (‘overreaction’) so that pre-event and post-event abnormal returns have the opposite sign. 2. Statistically significant return momentum is observed for many days after publication. 3. Inferences drawn from an event study are often very sensitive to the assumed event window. 4. The average news story has a bigger and more prolonged impact during a recession than during an expansion.