Introducing the RavenPack Sentiment Index
Published Date: December 1, 2011
Author: RavenPack Quant Research Team
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
- From January 2000 to September 2011, the contemporaneous
correlation between the RavenPack Sentiment Index and the S&P 500 Index is
- 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
- The sentiment based trading strategy based on weekly
VAR(10) yields an annualized return of 13.4% between March 2000 and September
- 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.