Wednesday, March 26, 2008
Fascinating paper just published - The Impact of Blog Recommendations on Security Prices and Trading Volumes.
The conclusion is that some blogs can and do move the market. A few telling points, as summarized by the CXO Advisory group:
The long (short) recommendations of bloggers appear consistent with contrarian (momentum) strategies.
Blog buy and sell recommendations on average exhibit some value, with considerable variation among blogs.
Cumulative abnormal returns for long (short) recommendations over the 20 trading days following blog publication are positive and significant (negative but not significant).
Recommended buys (sells) generate an average abnormal return of +0.4% (-1.8%) in the two trading days immediately following publication, with 54% (66%) of the two-day returns positive (negative).
The recommendations of the best (worst) performing blog generate an average cumulative abnormal two-day return of +10% (-7.4%), based on eight (just two) recommendations.
Blog readers appear to react more strongly to:
Recommendations from bloggers with graduate degrees in finance or economics.
Bloggers mostly echo information already available in the media, but market reactions suggest some uniqueness of information/analysis and/or distribution channel.
The absence of price reversals in the twenty days following publication support the hypothesis that blogs offer genuine information.
Now consider how the FirstRain customer base uses blogs (our financial services customers are 50% hedge funds, 50% institutions). We cover all types of information from the web but blogs are always a talking point as we set up a customer configuration.
- 10% of our customers are aggressively focused on mining ideas and questions out of industry or geography specific blogs
- 30% of our customers identify blogs as a key component of the valuable data and perspective on the web
- 50% of our customers are suspicious of blogs - concerned that they are not valuable but watching them to learn
- 10% of our customers ask us not to include blog results
As blogs continue to grow and change, and as traditional publishing continues to decline in the face of fast-paced web publishing, savvy investors are learning how to use the new media.