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When can the market identify old news?

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  • Fedyk, Anastassia
  • Hodson, James

Abstract

What drives the puzzle of market reactions to old news? Motivated by theories of correlation neglect, we conduct an experiment on finance professionals and show that even sophisticated investors have difficulty identifying old information that recombines content from multiple sources. We evaluate the market implications of this mechanism using a unique dataset of 17 million news articles from the Bloomberg terminal. Recombination of old information prompts larger price moves and subsequent reversals than direct reprints. This effect persists across news sentiment, ambiguity, and investor attention. Furthermore, while overall reactions to old information decline over time, differential reactions to recombinations increase.

Suggested Citation

  • Fedyk, Anastassia & Hodson, James, 2023. "When can the market identify old news?," Journal of Financial Economics, Elsevier, vol. 149(1), pages 92-113.
    • Handle: RePEc:eee:jfinec:v:149:y:2023:i:1:p:92-113
    DOI: 10.1016/j.jfineco.2023.04.008
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    Cited by:

    1. Bolte, Lukas & Fan, Tony Q., 2024. "Motivated mislearning: The case of correlation neglect," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 647-663.
    2. Zhang, Zuochao & Goodell, John W. & Shen, Dehua & Lahmar, Oumaima, 2024. "Media opinion divergence and stock returns: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    3. Huang, Alan Guoming & Wermers, Russ & Xue, Jinming, 2023. ""Buy the rumor, sell the news": Liquidity provision by bond funds following corporate news events," CFR Working Papers 23-07, University of Cologne, Centre for Financial Research (CFR).

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    More about this item

    Keywords

    News; Recombination; Information processing; Correlation neglect; Inattention; Reversal;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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