Headline Risk

What Is Headline Risk?

Headline risk is the possibility that a news story will adversely affect the price of an investment, such as a stock or commodity. Headline risk can also impact the performance of a specific sector or the entire stock market.

Understanding Headline Risk

Headline risk is the risk that a news headline or story can influence the price of a stock, sector, or broader market. Suppose that a pharmaceutical company releases a new drug called “Cholestride” that dramatically reduces a person’s cholesterol levels. In response to the drug, a competitor organizes for a study that finds a possible but not conclusive link between the new cholesterol medication and liver damage. This creates a headline risk for Cholestride's makers that must be managed to prevent it from having a material impact on the company's stock price.

Headlines generated by newspapers, television, or online - including social media posts - can moves stock prices. Note that prices can move, even if the story is incorrect or misleading, although in such cases the prices will tend to snap back. Headlines can also create positive movements, such as the approval of a new drug by the FDA or some other breakthrough.

Headline risk can be mitigated through effective public relations (PR) campaigns. Successful public relations efforts can promote positive images of a company that can help counteract any negative stories as well as provide swift damage control if such a story is released.

Managing Headline Risk

Investors cannot control or manage headline risk directly unless they are able to manipulate the flow of information before it becomes public. Such efforts could potentially be considered to include unethical behavior depending on the circumstances and the information involved.

But investor sentiment can be quite capricious and even a trivial headline could trigger behaviors that will negatively affect asset prices. Headline risk is really nothing more than price risk. As such, it is best managed through diversification and allocation rules in a portfolio, or by trading position rules that employ stop-loss strategies.

Example of Sector-Specific Headline Risk

In the aftermath of the 2007–2010 subprime lending crisis, mortgage lenders such as Bank of America, JPMorgan Chase & Co. and Citigroup faced significant headline risk from other financial institutions collapsing or coming under severe financial pressure.

After the collapse of Lehman Brothers and the bailout of prominent financial institutions including Fannie Mae and Freddie Mac in 2008, investors had little confidence in the stability of the financial system, and any negative headline relating to the financial sector had the potential to spark a stock selloff in financial stocks.