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How News Events Impact Market Sentiment

Published Date: April 21, 2010
Author: Peter Ager Hafez

Brief:

This study provides a methodology to construct market and industry-level sentiment indexes from RavenPack News Analytics.

Abstract:

News sentiment is shown to outperform one-month price momentum when predicting future returns of the S&P500. Market and industry-level sentiment indexes are constructed based on a bottom-up approach considering the impact of company-specific news events and their corresponding sentiment. As part of constructing the indexes, I show that company relevance and event novelty are important elements of a news-based strategy, since including only the most relevant and novel news stories result in improved Information Ratios. From May 2005 through December 2009, the strategies tested deliver double digit positive returns in out-of-sample testing. In addition, I show how industry sentiment can add value when constructing market-neutral strategies taking long and short positions in top-ranked and bottom-ranked industries, respectively. Finally, I show that targeted directional exposures to top-ranked and bottom-ranked industries can improve a trading strategy beyond simple S&P500 index exposures.
   
 

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