Tuesday, March 26, 2013

Does Public Financial News Resolve Asymmetric Information?

The author, Paul C. Tetlock, looks at four different predictions in relation to financial news and the role that plays in the stock price. He was interested in analyzing the role of news analysis in stock pricing; to test this Tetlock used news that is found in the news archive of the Dow Jones using 29 years of information.  For this study, public information is measured by the return on stocks in the Dow Jones on news days.

The author determined that there is a correlation between the news reports released and the stock price the few days following the release.  This demonstrates a definite relation between the media and the prices of publicly traded stocks.  The number of informed investors increases due to the release of news, which in turn affects the stocks for that time period.  The author's presentation of the paper and research added to the previous body of knowledge surrounding the influence and impact of news releases.

Additionally, the author looked at the change in the relation of knowledge the investors had, specifically in regards to the release of information by the media.  The information that was included and determined from this study is not only associated with trading and finance, but has the potential to influence the manner in which firms view their stocks and the potential analysis that may result from that.

This article provided a good application of news analysis, and while it has a strong financial application, it does not specifically discuss the intelligence field.  While the use of news analysis should be support by other techniques or sources, it does provide a level of insight into public perception pertaining to certain issues that are taking place. Public sentiment and the information portrayed by the media has the potential to influence the intelligence field and should certainly be considered as one of the methods employed in analysis.

Another element, which the author did note, is the fact that this study did not account for the potential behavioral biases which are involved in the processing and interpretation of news.  While this does not discount the method, it is something which needs to be taken into consideration when utilizing this tool as an analytic approach.

Tetlock, P. C. (2010). Does public financial news resolve asymmetric information? AFA 2010 Atlanta Meetings Paper. Available from http://ssrn.com/abstract=1303612

1 comment:

  1. I found this to be an interesting study.The reliance on news and information that the stock market has is not something new, but this reliance could be used for manipulation or even sabotage (by planting false information). I also had no idea that the Dow Jones hosted a news archive.