Detecting and Profiting from the Future

Recorded Future identifies and collects discussion of events scheduled/speculated to happen in the future, and we want to find ways to incorporate this information into investment strategies. We’ve already seen some predictive power with these “future” events and are in the process of "pulling it apart." Specifically, we’ve investigated the market impact of our “future” events and observed some interesting behaviors.

When we look at market returns in the 5 days before and after a forecast event, we see a slight rise in returns before the event followed by a drop after the actual occurrence of the event.

Since these events are known ahead of time, it is initially surprising that there is any price movement at the event.

Drilling into the data a little further, we looked at just the most scheduled events: earnings calls. We see that when the future event is an earnings event, on average there is a ~25bp rise before the event followed by a ~25bp drop after the event.

This was a surprisingly large movement and may fall into our crowded investment thesis noted in an earlier post. When the earnings call is coming, there is a lot of attention on it, and then that attention dissipates. Our analysis suggest that cumulative returns on average follow the same pattern.

In contrast, for all other forecast events in our system there is essentially no movement before the event and a ~10bp drop after.

These events seem to drive no activity beforehand but are predictive of a slight drop afterwards. Now, this is averaged over 16000 trades and indicates a significant relationship. We will continue to drill down into subsets of events to find additional investment opportunities.

In this analysis, we are building on two earlier blog posts where we looked at forecast events and event studies. Our forecast events occur when an event is reported to occur after the publication date. For example, “The Verizon iPhone will be available to all on February 10th.” was published at mobilemarketingwatch.com on January 11.

We collected about 20000 of these events for S&P 500 companies over roughly the last two years and found the above patterns by looking at the average market adjusted returns for these companies in the days leading up to and after reported events. Additionally, we saw volume increases in all three analyses ranging from an increase in 3 standard deviations from normal in the earnings call events to a tenth of a standard deviation above average for the data without earnings calls.

Why is there the average drop after the event for non-earnings related events? Is negative information being withheld at announcement? Is speculative and forecast related news typically negative? Watch this space for further investigation of data from our news analytics API.