Critical Analysis and Gap in Research

By combining the information above we can make the following inferences:

1) Stock markets adjust to direct company-related news almost instantaneously due to the existence of data-mining programs

2) Because of the data-mining programs arbitrage opportunities arising from news disappear

3) Theoretically, an event in an oligopolistic market can be beneficial for one company, but bad for another

4) Data-mining programs, however, are not sophisticated enough to predict competitors’ stock price reaction to a news article

5) Some events are empirically tested to be similar to Situation X, such as cost reduction

However, the literature does not cover the influence of news on competitors’ stock prices. The articles I mentioned in the “Competitors’ Effect Literature” cover only quantitative data, such as found in financial statements, earnings forecasts and repurchases.

Moreover, text-mining software does not exploit this kind of news. They are, however, able to identify situation Y news, as the article is shared by all the companies within the industry.

Therefore, the combination of news effect on competitors and data mining is the scope of research of this dissertation. It will attempt to test the existence of arbitrage profits from such events.

Methodology

Sample selection

Technological companies that are constituents of S&P Technology & Hardware Equipment (LSP50THE​) are selected for the sample. The sample period is chosen from 25th November, 2011 to 26th November, 2013. Companies that delisted during the period are removed. Also, firms with market capitalisation of less than 1 billion USD are deleted in order to have liquid markets. Finally, companies with competitors which do not fit the above conditions are removed as well.

The competitors for the companies are chosen from Yahoo Finance competitors section. If some of the competitors did not fit the criteria above (i.e. were not listed in the SP technology index) they were not included in the sample. Some companies appeared to have one competitor, while the rest had two.

The technological sector is chosen for the research because oligopolistic market structure prevails in this industry, Pindyck and Rubinfeld (2013). Delisted companies are removed from the sample, as their returns are zero for all non-trading days, which would imply no reaction to competitors’ news due to research design (discussed later). It also removes the ability to test for arbitrage opportunities. Illiquid companies are also removed from the sample as their trades are rare. Moreover, the difference in market capitalisation cannot qualify them to be competitors, as suggested by the Yahoo Finance. Finally, companies, whose competitors fail to fit these filters, are also removed for the same reasons.

Research Design

Date: 2015-12-17; view: 816