The strategy trades NYSE, NASDAQ, and AMEX stocks based on daily news returns, taking value-weighted long positions in top-decile stocks and short positions in bottom-decile stocks, held for five days.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Daily | MARKET: commodities | KEYWORD: News
I. STRATEGY IN A NUTSHELL
The strategy trades U.S. stocks using high-relevance news, going long on top-decile and short on bottom-decile stocks based on aggregated 15-minute news returns, holding positions for five days.
II. ECONOMIC RATIONALE
Delayed investor reactions and slow market adjustments to firm news create exploitable opportunities, allowing the strategy to profit from gradual price responses to high-impact information.
III. SOURCE PAPER
Pervasive underreaction: Evidence from high-frequency data [Click to Open PDF]
Hao Jiang, Michigan State University – Eli Broad College of Business; Sophia Zhengzi Li, Rutgers, The State University of New Jersey – Rutgers Business School at Newark & New Brunswick; Hao Wang, Prime Quantitative Research
<Abstract>
We propose a novel high-frequency decomposition of daily stock returns into news- and non-news-driven components, and uncover evidence of pervasive stock market underreaction to firm news. Prices tend to drift in the same direction as the initial market response for several days after the news arrival without reversals. A trading strategy exploiting the return drift generates high abnormal returns and remains profitable after transaction costs. To understand the economic mechanism, we find that the return drift is stronger when investors are distracted. Analysts’ slow adjustments of market expectations following firm news also contribute to the market underreaction.
IV. BACKTEST PERFORMANCE
| Annualised Return | 20.98% |
| Volatility | 16.18% |
| Beta | N/A |
| Sharpe Ratio | 1.3 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
