How news affect stock markets?

Andronicus's picture
Rank: Chimp | 12

I know it might sound like a silly question to most of you. However, I want to make use of your knowledge and experience so as to learn these things faster and more effective.

The thing is I need tips or some source how to learn how certain news affect certain markers. Moreover, I would like to learn as well how markets would react to some events, including sudden war, unexpected decision of important politician or natural disaster. What's the best way to learn that?

I'd appreciate serious answers and please don't take the mickey.

Comments (9)

Aug 4, 2018

Hi Andronicus, just trying to help:

Or maybe the following WSO members have something to say: @Inglis @rob-nuccio @PJM2ERCOT

If those topics were completely useless, don't blame me, blame my programmers...

Aug 7, 2018

That's a very complex subject.

I know an extremely interesting blog, they study news articles with insert machine learning/big data/AI stuff and try to predict market sentiment:
http://www.epsilontheory.com/
Tons of interesting reads! ENJOY.

Aug 8, 2018

Tougher question than it seems at first.

From a very zoomed-out, theoretical perspective, news articles about sudden wars or important political decisions are economic shocks.

These could be demand shocks (9/11 and travel companies/airlines -- demand was lower because nobody wanted to fly) or supply shocks (2014 Thanksgiving Oil Crash -- Saudi Arabia refused to cut oil production at OPEC meeting)

Shocks can be either negative or positive, meaning that they can shift the respective supply or demand curve either rightward or leftward. This then goes on to affect the price of the good sold and the quantity available, etc.

If you were looking for something more detailed or specific, there's a plethora of bots and AIs dedicated to sentiment analysis of text.

Without diverging too far into the details of how these work, some of the most basic approaches include taking a news article and splitting it into a "bag of words" and then looking at the emotional score or valence of each word/phrase and then assigning a score to the article as a whole. The idea being that an article containing the words "happy, wonderful, magnificent, splendid" is likelier to be good news than an article containing the words "disastrous, horrific, awful, etc."

Of course it gets a lot more complicated than just that, for example you could have a sentence that says "Investors are NOT happy" and so on.

Another technique is to scan articles for important numbers, like the Earnings Per Share (EPS) of a company when it's released on a quarterly basis. Oftentimes, if the EPS beats analysts expectations, it could be interpreted as good news.

Before I get crucified though, let me hedge that statement a bit by saying that it's not always the case. For example, when Twitter released their quarterly earnings in July of 2018, revenue and earnings both beat expectations but the stock still plummeted. Why? Because there was a drop of around 1 million monthly active users.

That's what makes your question so difficult. It can be hard to tell how people will react to news until they actually do.

Aug 8, 2018

Depends on your view of market efficency. It has been widely argued that once you see a news piece the 'market' has already incorporated it's meaning

"I am not sure who this 'Anonymous' person is - one thing is for certain, they have been one hell of a prolific writer" - Anonymous

Aug 8, 2018

The market reacted quite strongly to the note in the FT re; Bernanke winding down QE by like 20Billion. Dow dropped a hundred pretty fast, albeit it gained some of it back but still. Reasonable correlation to a news story. However unsure about other papers - but there is much merit in saying the market generally incorporates info pre news announcement.

However its based on perceptions, so if the broad perception is detached or dislocated from the news that gets reported, - and its viewed as credible - i see no reason why it wouldn't move the market.

Aug 8, 2018

From Businessweek article, How the Robots Lost: High-Frequency Trading's Rise and Fall: "Other HFTs are using sophisticated programs to analyze news wires and headlines to get their returns. A few are even scanning Twitter feeds, as evidenced by the sudden selloff that followed the Associated Press's hacked Twitter account reporting explosions at the White House on April 23."

Aug 8, 2018

News has a great impact on the market. If you believe that market efficiency BS you are deluded and need to check into a padded room. The fact of the matter is there is no way that the market can accurately gauge how society as a whole will react to a breaking news story even if its something that everyone pretty much knew anyway. Confirmation basis is huge in the market. Look at any merger announcement, everyone can actually know the announcement is going to be made yet that doesn't stop market movement when it is actually announced.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Aug 8, 2018
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