The theory states that there exists an optimum time window to foresee the impact of new information released and the market correction to equilibrium.

University of Michigan - Ann Arbor

The main findings from previous studies in NLFF are as follows:
- The illusion of growth
- The predictability of financial news
- The “20-minute” theory
- The Monday effect
- The reversal effect

Main Findings in NLFF

https://dspace.mit.edu/bitstream/handle/1721.1/116314/10462_2017_9588_ReferencePDF.pdf?sequence=2&isAllowed=y

A Survey of Natural Language Based Financial Forecasting

The way growth rate is calculated for each period brings up the illusion of growth when the price of an asset is actually stagnant. Regardless of the movement trajectory of price, the average growth rate is always positive. This mathematical rule alerts us it is important to reduce volatility with regard to trading strategy

The Illusion of Growth

Literature argue that the reversal of sentiment will be slightly ahead of price reversal. As a result, sentiment reversals can serve as buy/sell signals in constructing trading strategies. Though sentiment levels and changes are strongly correlated with contemporaneous market returns, but have little predictive power for the near-term (weekly) stock market.

The Predictability of Financial News

The “20-minute” Theory

The effect of less trading volume by institutional investors at the
start of a week. Furthermore, the market also tends to be bearish at the start of a new week.

The Monday Effect

An increasingly optimistic mood from message boards usually leads to negative return for the next trading day. Disagreement among the posted messages is associated with increased trading volume for the day, but will decrease trading volume for the next trading day, though this may only apply to developed markets.

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