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News Sensitivity in Sector Rotation Models

Published Date: July 24, 2012
Author: RavenPack Quant Research Team

Brief:

This study examines the sensitivity of sectors to news as part of a sector rotation model.

Abstract:

Anecdotal evidence suggests that sectors experiencing hype tend to overreact leading to price reversion, while more lackluster sectors tend to rebound after a period of underperformance. In this study, we provide direct evidence supporting this anecdote and show that news analytics can be useful to capture the self-correcting process following periods of overreaction and underreaction. Below are some of the key results:

News Sensitivity Adds Value to Sector Rotation Models

  • News sensitivity, as captured by the responsiveness of individual sectors to market level sentiment, varies across sectors as well as during bull and bear markets
  • Following a period of overreaction or underreaction to news and sentiment, it takes as long as 2 to 6 months for market prices to correct themselves
  • With a 6-month holding period, our sector rotation strategy generates an annualized return of 9.54% with an Information Ratio of 1.10 and a Hit Ratio of 0.68

   
 

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