Investor Reaction to News is Asymmetric

Posted by Mike Shell on January 22, 2012

I believe investors react differently to good news than bad news. Investor reaction to good and bad news is asymmetric: bad economic news is likely to play a more significant role in shaping investors’ expectations than good economic news. 

A research paper by Abdulaziz M. Alwathainani titled "Does Bad Economic News Play a Greater Role in Shaping Investors’ Expectations than Good Economic News?" (June 17, 2010) is an example of evidence of our belief. Abdulaziz says:

Investors’ responses to consistency in good and bad news are asymmetric. Bad economic news is likely to play a more significant role in shaping investors’ expectations than good economic news.

The truth about asymmetric market returns: fat-tails and black swans

Posted by Mike Shell on January 22, 2012

Market returns are asymmetric, they have fat-tails that make market data an asymmetrical distribution, not a symmetical normal distribution. Extreme Events on a Univariate Level: Understanding the Fat-tails of a Risk Driver reveals:

These findings prove that risk estimates based on the normal distribution, even with volatility clustering, systematically misrepresent the true nature of the risk being taken. More sophisticated modelling techniques are necessary in order to capture widely observed phenomena such as risk asymmetry and fat tails. 

Source: http://www.finanalytica.com/uploads/ExecutiveBriefings/Factor_Distribution_Case_Study_-_5-21-09.pdf