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Event Trading Using Market Response

Published Date: July 22, 2011
Author: Peter Ager Hafez

Brief:

This paper shows how to enhance event-driven trading strategies by considering the prevailing market environment and market response to news events.

Abstract:

This paper shows how to enhance event-driven trading strategies by considering the prevailing market environment and market response to news events like layoffs, executive appointments, or analyst recommendations. I find that a market response technique significantly improves both the daily Hit Ratio and the risk-adjusted performance of the benchmark strategies that take either long or short position throughout the entire backtesting period. Generally, I find that the market response approach works best for the most frequent event categories, since this allows for a more local extraction of the market environment around the time of the event. For events with at least 10,000 instances during the backtest period, the market response approach improves the benchmark strategy in 76% of the cases, while as much as 95% when focusing on raw returns rather than excess returns.
   
 

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