[Empirical Finance Research Blog] Contagious Speculation and a Cure for Cance...
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Wesley R. Gray
Sep 4, 2009, 8:26:50 AM9/4/09
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Investment Potential Rating: ?/10 (1 worst, 10 best)
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Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar
Gur Huberman
Columbia Business School
Tomer Regev
Columbia Business School
The Journal of Finance, Vol LVI, No. 1, February 2001 http://www0.gsb.columbia.edu/faculty/ghuberman/PDFpapers/CancerCure.pdf
Abstract:
A Sunday New York Times article on a potential development of new cancer-curing drugs caused EntreMed’s stock price to rise from 12.063 at the Friday close, to open at 85 and close near 52 on Monday. It closed above 30 in the three following weeks. The enthusiasm spilled over to other biotechnology stocks. The potential breakthrough in cancer research already had been reported, however, in the journal Nature, and in various popular newspapers (including the Times) more than five months earlier. Thus, enthusiastic public attention induced a permanent rise in share prices, even though no genuinely new information had been presented.
Data Source:
The authors exam the New York Stock Exchange Trade and Quotes (TAQ) database for intraday data, prices, and quotes. They also use CRSP data for daily returns and information found in SEC filings. This paper does not involve heavy database use and could be replicated with any number of data sources.
Data Specification:
The semi-strong form of the efficient market hypothesis is straightforward: stock prices immediately reflect all publicly available information. Simple enough. Microsoft comes out with news they found a $100billion in cash sitting in a garage, the stock price should move up by around $100billion almost immediately.
The problem with the simple statement of the semi-strong efficient market hypothesis is that it is too simple. It makes a key assumption--collecting, understanding, and rationally synthesizing public information is easy, fast, and cheap. Anyone who has read 1000's of pages of SEC documents and spent hours on the phone with a company's management trying to understand the intricacies of their business and public statements knows otherwise. It seems a bit contrived that investors somehow have a super-human ability to digest massive amounts of new information in a quick, unbias, and cheap way. This doesn't even include the fact that even IF there were some investor with super human ability, the limits of arbitrage may keep him from placing his bet.
This paper highlights just how silly the semi-strong market hypothesis can be in certain circumstances. The reality is that public information isn't always perfectly reflected in a stock's price. Moreover, this work shows that the most important aspect of information is not the actual information but the messenger of the information.
Investment Strategy:
The optimal investment strategy here is not clear cut. The point of this post is to get us thinking about systematic ways to take advantage of future EntreMed situations. Here is a suggested avenues of approach that we are debating internal to our own organization. If you have any other ideas please share them with the community.
Approach 1:
1. Identify scientific journals and/or niche trade journals where companies discuss new breakthroughs or products that can have significant impacts on shareholder value (e.g. Nature).
2. Determine if it can be verified that the efficient market hypothesis is likely to have failed (i.e. information is limited to a small audience and/or difficult to digest for typical investor).
3. Work on information dissemination--force the semi-strong efficient market hypothesis to come true. (i) draft an interesting story for public dissemination, (ii) query editors and/or journalists, (iii) post on blogs, message boards, and other outlets followed by investors.
4. Ride the wave.
It always sounds so easy in theory...
Implementation Issues and Remarks:
This paper is a bit outside the box from our typical post, but we think it is important. I know it got us thinking about new trading ideas and ways to approach the market, so I'm sure it will help our readers out as well. Good luck.
Investment Potential Rating: ?/10
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Posted By Wesley R. Gray to Empirical Finance Research Blog at 8/28/2009 03:33:00 PM
============
Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar
Gur Huberman
Columbia Business School
Tomer Regev
Columbia Business School
The Journal of Finance, Vol LVI, No. 1, February 2001 http://www0.gsb.columbia.edu/faculty/ghuberman/PDFpapers/CancerCure.pdf
Abstract:
A Sunday New York Times article on a potential development of new cancer-curing drugs caused EntreMed’s stock price to rise from 12.063 at the Friday close, to open at 85 and close near 52 on Monday. It closed above 30 in the three following weeks. The enthusiasm spilled over to other biotechnology stocks. The potential breakthrough in cancer research already had been reported, however, in the journal Nature, and in various popular newspapers (including the Times) more than five months earlier. Thus, enthusiastic public attention induced a permanent rise in share prices, even though no genuinely new information had been presented.
Data Source:
The authors exam the New York Stock Exchange Trade and Quotes (TAQ) database for intraday data, prices, and quotes. They also use CRSP data for daily returns and information found in SEC filings. This paper does not involve heavy database use and could be replicated with any number of data sources.
Data Specification:
The semi-strong form of the efficient market hypothesis is straightforward: stock prices immediately reflect all publicly available information. Simple enough. Microsoft comes out with news they found a $100billion in cash sitting in a garage, the stock price should move up by around $100billion almost immediately.
The problem with the simple statement of the semi-strong efficient market hypothesis is that it is too simple. It makes a key assumption--collecting, understanding, and rationally synthesizing public information is easy, fast, and cheap. Anyone who has read 1000's of pages of SEC documents and spent hours on the phone with a company's management trying to understand the intricacies of their business and public statements knows otherwise. It seems a bit contrived that investors somehow have a super-human ability to digest massive amounts of new information in a quick, unbias, and cheap way. This doesn't even include the fact that even IF there were some investor with super human ability, the limits of arbitrage may keep him from placing his bet.
This paper highlights just how silly the semi-strong market hypothesis can be in certain circumstances. The reality is that public information isn't always perfectly reflected in a stock's price. Moreover, this work shows that the most important aspect of information is not the actual information but the messenger of the information.
Investment Strategy:
The optimal investment strategy here is not clear cut. The point of this post is to get us thinking about systematic ways to take advantage of future EntreMed situations. Here is a suggested avenues of approach that we are debating internal to our own organization. If you have any other ideas please share them with the community.
Approach 1:
1. Identify scientific journals and/or niche trade journals where companies discuss new breakthroughs or products that can have significant impacts on shareholder value (e.g. Nature).
2. Determine if it can be verified that the efficient market hypothesis is likely to have failed (i.e. information is limited to a small audience and/or difficult to digest for typical investor).
3. Work on information dissemination--force the semi-strong efficient market hypothesis to come true. (i) draft an interesting story for public dissemination, (ii) query editors and/or journalists, (iii) post on blogs, message boards, and other outlets followed by investors.
4. Ride the wave.
It always sounds so easy in theory...
Implementation Issues and Remarks:
This paper is a bit outside the box from our typical post, but we think it is important. I know it got us thinking about new trading ideas and ways to approach the market, so I'm sure it will help our readers out as well. Good luck.
Investment Potential Rating: ?/10
--
Posted By Wesley R. Gray to Empirical Finance Research Blog at 8/28/2009 03:33:00 PM
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