Buy the rumor, really, buy the rumor

We ran an event study to look at stock returns following high momentum high sentiment days for the S&P 500 over the last 21 months or so. And while we did see an increase in market adjusted returns after the event, we saw much more dramatic returns before the event.


Lets take a closer look. Specifically we defined our events to be the 5 highest momentum days with high positive sentiment for each company. Momentum and sentiment are metrics we derive from online content as we harvest it and in this case, we aggregate these metrics for individual companies. In the plot we are looking at the average cumulative returns for the roughly 2000 events starting 20 days before the event and ending 20 days after. The large jump at day 0 is the return from the close the day before the event day to the close on the event day. Not surprisingly, there is a large jump on the event day. Additionally, there is a small rise after the event day. Specifically, about 28 bps in the 5 days following the event day (p=.03). Maybe enough to cover trading costs. Maybe not.

However the bulk of positive return associated with the event occurs before the event happens. Given the large jump on event day, its clear that the information isn’t completely priced in before the event occurs. But someone was buying well before the events. Someone who had access to the rumor.

These types of event studies are pretty straightforward with the Recorded Future content. Extract the data from the database, define the event and test. The opportunities here are to define the news analytic events that allow us to get in earlier on price movements like the one above. Instead of waiting for the 30bp available after it happens.