A vote of confidence in financial bloggers – at least those featured on Seeking Alpha - emerges in a paper looking at the effect of their stock predictions.
According to the paper* by Veljko Fotak, a Doctoral candidate at the University of Oklahoma’s Price College of Business, blog recommendations appear to have an impact on stock prices and trading volumes.
The average market reaction is of an increase in stock prices of around 0.4% for long recommendations and a decrease of 0.8% for short recommendations.
The analysis was based on 500 buy and sell recommendations for the year 2006 from SeekingAlpha; of those, 340 are classified as long recommendations and 160 as short. The recommendations originated from 107 different blogs and 122 distinct bloggers.
Fotak found abnormal trading volumes after recommendations, but also that trading volumes appear abnormal in the days preceding the blog posting, which does leave open the possibility that abnormal trading volumes following blog publications are a result of trading momentum. “The stronger impact of short recommendations offers additional evidence in the still open debate as to whether short recommendations do lead to stronger market reactions,” Fotak writes.
Unlike studies of the effects of e-mail spam, Fotak found “no evidence of short-term mean reversion in the days following the event. “This difference in market reaction can be interpreted as an indication of the fact that, while e-mail spam is, often times, an attempt to manipulate markets, blogs are not. E-mail spammers spread false information in order to move the price of a security; eventually, the price reverts to its fundamental value. In the case of blogs, it is plausible to hypothesize that posters are acting out of a genuine desire to spread real information. The lack of mean reversion in prices following publication supports this hypothesis.”
Bloggers do appear, for the most part, to echo information already available in the media, Fotak writes. “Yet, as market reactions to select blogs suggests, some do spread genuine information and analysis, which does lead to a market adjustment.”
*The Impact of Blog Recommendations on Security Prices and Trading Volumes (Veljko Fotak - Michael F. Price College of Business, University of Oklahoma)