Factoring Sentiment Risk into Quant Models
Published Date: February 2, 2012
Author: RavenPack Quant Research Team
Summary:
By utilizing the RavenPack Sentiment Index, a news-based proxy for market sentiment,
this study explores the concept of "news beta" or the sensitivity of stock
returns to changes in market sentiment as reported in the news.
- News Beta Holds Low Correlation to Traditional Quant
Factors
- The correlation between news beta and the exposure to market, size, value,
and momentum factors is relatively low.
- There is no significant difference in company size across news beta deciles.
- With a 6 or 12 month holding period, stocks that fall into the lower news
beta decile generally yield higher returns.
- News Beta Strategies Deliver High Risk-adjusted
Performance
- From Feb 2002 to Sept 2011, the value-weighted zero-investment portfolio based
on news beta yields an annualized return of 8.9%.
- This news beta investment strategy works best for large cap stocks given their
greater news coverage.
- From Feb 2002 to Sept 2011, the Hit Ratio and Information
Ratio for the value-weighted portfolio in the 10th size decile is 60.3%
and 1.34 respectively.
