Abstract
The browsing frequency of Wikipedia pages for companies listed in the Dow Jones Industrial Average (DJIA) has been shown to be related to future DJIA changes. The number of Wikipedia page views increases after new information for these companies is released. Therefore, the frequency of listed companies’ news releases often reflects future stock market conditions. We show that the trading strategy performance of a stock index based on the frequency of news releases is better than that of a trading strategy that randomly buys or sells its stock index. When the number of news articles for companies listed on the NYSE and NASDAQ increases/decreases in a week, the Standard & Poor’s 500 index (S&P500 index) tends to fall/rise the following week. In particular, the trading strategy performance using news articles for the business sector is good. We confirmed these characteristics for the period of December 2007 to April 2012.
Highlights
Asset prices are moved by an endogenous mechanism that follows past price changes created by trend followers and by an exogenous mechanism of reactions to sudden financial market news (Jiang et al 2007; Sornette 2006)
When the number of news articles for companies listed on the NYSE and NASDAQ increases/decreases in a week, the Standard & Poor’s 500 index (S&P500 index) tends to fall/rise the following week
We showed that the trading strategy performance of a stock index based on the frequency of news releases is better than that of a trading strategy that randomly buys or sells its stock index
Summary
Asset prices are moved by an endogenous mechanism that follows past price changes created by trend followers and by an exogenous mechanism of reactions to sudden financial market news (Jiang et al 2007; Sornette 2006). Investigation of historical tick-by-tick data of prices has shown that endogenous mechanisms follow a multiplicative process. This multiplicative process generates a fat tail of price changes (Newman 2005). Since news media concentrates on topics that attract attention, the number of news articles on a certain topic might increase before a stock market index falls, as in the relationship between the browsing frequency of Wikipedia pages and DJIA. We show that the trading strategy performance of a stock index based on the frequency of news releases for the stock market is better than that of a trading strategy that randomly buys or sells the stock index. 3, we introduce a stock index trading strategy based on the frequency of news releases for listed companies.
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