Time Variation in the News-Returns Relationship

Paul Glasserman, Fulin Li, and Harry Mamaysky

♦ The speed of stock price reaction to news exhibits substantial time variation. Higher risk-bearing capacity of financial intermediaries, lower passive ownership of stocks, and more informative news increase price responses to contemporaneous news; surprisingly, these interaction variables also increase price responses to lagged news (underreaction). A simple model with limited attention and three investor types—institutional, non-institutional, passive—predicts the observed variation in news responses. A long-short trading strategy based on news sentiment earns high returns, which increase when conditioning on the interaction variables. The interactions we document are robust to the choice of news source.

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