Introducing the RavenPack Sentiment Index

Published Date: December 1, 2011
Author: RavenPack Quant Research Team

Summary:

To capture the overall sentiment of the market, we construct a news sentiment index based on the Event Sentiment Score (ESS) developed by RavenPack. The index is constructed using a simple, intuitive, and robust approach capturing the sentiment momentum on the US market over a three-month period.

• The RavenPack Sentiment Index Moves Closely with Financial Markets
  • From January 2000 to September 2011, the contemporaneous correlation between the RavenPack Sentiment Index and the S&P 500 Index is 79%.
  • The RavenPack Sentiment index is consistently highly correlated with the S&P 500 Index across different market trends. Especially, we find an average correlation of almost 90% during bear markets.
  
  
• The RavenPack Sentiment Index is both Statistically and Economically Significant
  
  A casual relationship exists from market sentiment to stock market returns:
  • The sentiment trading strategy based on monthly VAR(2) yields an annualized return of 10.2% between March 2000 and September 2011.
  • The recursive monthly VAR(2) model is able to generate an out-of-sample annualized return of 6.7% between April 2006 and September 2011.
  • The sentiment based trading strategy based on weekly VAR(10) yields an annualized return of 13.4% between March 2000 and September 2011.
  • The recursive weekly VAR(10) model is able to generate an out-of-sample annualized return of 17.5% with an Information Ratio of 0.81.