Monday, July 16, 2007
More on news-driven trading
For readers who are interested in news-driven trading, here is another article. This article pointed out a contrarian view offered by Richard Oldfield, a fund manager, who says “price movements in response to news are exaggerated, providing an opportunity to those who do not base too much on what has happened in the last hour or 24 hours.” [my italics] I am not sure whether Mr. Oldfield's statement is based on any statistical research or not -- as far as I can ascertain, his book "Simple But Not Easy” cannot be purchased anywhere in North America. However, I should point out that this statement is in contradiction to an abundance of research done on Post Earnings Annoucement Drift (PEAD): the phenomenon that stocks with positive earnings news continue to trend up for a long time. Furthermore, if indeed price movements in response to news are exaggerated (contrary to the findings of PEAD), it would seem to suggest a reversal trade rather than suggesting that the news can be ignored!
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Perhaps, Mr.Oldfield was refering to just a single quarter or just 5 or 10 business days after the earnings announcements when he says that the price movement is exaggerated.
Suppose, the stock was trading at $50.00 before earnings. After (good) earnings announcement, it keeps rising for 1 or 2 trading sessions (or 'jumps') and becomes 56.00.
Then in the next few weeks it gradually comes down to 53.00.
That the price hit 56.00 is due to the over-reasction from the investors.So perhaps there is a trading opportunity ( just like you have mentioned in the final sentence) after the prices 'hits the roof' after a good earnings announcement.
Now whether the stock keeps rising depends on whether the company announces good results over the next few quarters as well.
Not all news is earnings-related. There is a vast amount of news out there other than earnings announcements which could move the price by altering market sentiment while the company continues to operate unaffected. Inaccurate takeover rumours are a classic example. This makes me doubt whether Oldfield intends to stand against the body of evidence for PEAD.
A question not directly related to this post. What in your opinion is the best way to optimize roll yield when trading commodity futures? I know Deutsche Bank Commodities has a new system to does this which is said to work very well.
My understanding is that roll-yield can only be achieved if the futures are in backwardation. If they are in backwardation, I believe you can calculate the average historical calendar spread and roll-forward when the spread is relatively high to achieve the highest roll-yield.
Perhaps you can provide a link or reference to the Deutsche Bank Commodities product that you referred to?
For more information on the DB Commodities optimization of roll yield, go to:
On the top right of this page, under the header "DB Research", the second PDF document listed "DBLCI-OY: Technology To Tackle Term Structure Dynamics" is the one of most interest.
Thanks for the link.
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