information leakage. In this example, we see what appears to be close to 90% of the
return occurring prior (to the left) of the event line.Efficient Market Hypothesisfans
might say, ‘‘We told you so’’, but that is not the full story here. A substantial portion of
this is likely occurring due to the categorization of ‘‘me too’’ stories, referring back to
the original good or bad news, and after-the-fact reporting, that ‘‘the stock moved up
sharply on good news that.. .’’ This is an example of the need to consider textual events
in context with others, rather than as atomic stand-alone events.
On first look, it also paints a somewhat discouraging picture for those who might
trade blindly on news characterization—by the time you read it and trade, there’s not
much left for you to pocket. Tetlock, Saar-Tsechansky, and Macskassy’s simulated
‘‘long on good news, short on bad news’’ trading strategies did show simulated profits,
but only with extremely low transaction costs (9 basis points). Most studies of actual
institutional transaction costs, including commissions and market impact, show one-
way costs of approximately 50 basis points. This means that additional analysis or
supplementation of news would be needed for a profitable real-world strategy.
Our efforts in this area are reported in this chapter. In comparison with Tetlock, Saar-
Tsechansky, and Macskassy (2008), we used a broader investable universe (the S&P
1500 instead of the S&P 500) over a period (2003–2009) fully in the web era, which has
transformed the dissemination of investment information, so there is no mix of pre- and
post-web effects. The next section describes the RNSE news dataset that is the basis for
this research.
152 News and abnormal returns
Figure 6.1.Tetlock, Saar-Tsechansky, and Macskassy’s news event study might lead to the false
conclusion that news stories hardly matter, but stories about price moves that have already
happened (e.g., ‘‘XYZ Soars 53 Percent on High Earnings’’) are included here, diluting the results
of true breaking news (source: Tetlock, Saar-Tsechansky, and Macskassy, 2008).