Quantifying the relationship between news and trading volume and price

Summary

A recent academic paper finds evidence for a relationship between the volume of news mentions of certain stocks and the volume of trading size of price change in those stocks.

Content

There have been quite a few papers on the relationship between news or information searching and market movements. But this paper, Quantifying the Relationship Between Financial News and the Stock Market, tries to measure the relationship.

To research this the authors, Merve Alanyali, Helen Susannah Moat and Tobias Preis, studied daily issues of the Financial Times for the period 2007-2012. (As a by-product of this analysis they found that 891,171 different words appeared in the FT over this period!)

They tracked mentions of the companies in the Dow Jones Industrial Index and the corresponding movements in volume and price for these companies on the NYSE for the same day and the following day.

They found evidence for a relationship between the number of mentions of a company on a day and both the volume of trading and size of price change for a company’s stock on the same day.

The following figure from the paper shows the ranking of DJIA companies according to the correlation between FT mentions and absolute movement in the stock price.

Source: Merve Alanyali, Helen Susannah Moat and Tobias PreisThe strongest correlation among the DJIA companies they found was for Bank of America.

The paper concludes with the qualification that their analyses do not allow them to draw strong conclusions about whether news influences the markets, or the markets influence the news; but they propose that movements in the news and movements in the markets may exert a mutual influence upon each other.

Citation

Alanyali, Merve and Moat, Helen Susannah and Preis, Tobias, Quantifying the Relationship Between Financial News and the Stock Market. Sci. Rep. 3, 3578; DOI:10.1038/srep03578 (2013)

 

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