Marion Munz
ABSTRACT
In today’s online real-time environment, the news that carries material information
affects the sentiment regarding the earnings multiple as it relates to stock prices. The
sooner investors recognize that there is a news component embedded in the stock price,
the sooner they will arm themselves with the necessary tools that would enable them to
take corrective action if necessary. The old formulas used for valuing stock prices need
serious revisions to incorporate the news sentiment as a critical variable.
Investors and traders alike must have the ability to act or react to fresh material
information regarding investments and trades. The current online trading platforms
offer just about every type of information related to stocks and equities in real time.
However, there is an increasing need for tools that offer an ability to interpret real-time
information, so investors and traders can make the best decisions possible.
News sentiment systems help to fill the gap in current stock price valuation formulas,
because they can help to determine the extent of the valuation multiple allocated to a
particular future earnings per share value to be reflected in the stock price.
4.1 INTRODUCTION
There is little doubt that news is very critical for the value of the stock price of a publicly
traded company. If nothing else, news is the main mechanism that communicates critical
information to the investing public. But, what makes this interesting is that in the USA
the way that public companies handle news is heavily regulated.
Why then is it that most of the formulas that are taught in business schools about how
to calculate the value of a stock price of a corporation do not involve the value of
‘‘news’’?
Could it be because this valuable information is not easy to quantify?
This is where systems that estimate the sentiment of news pieces come in to fill a big
void. In today’s world, where millions of investors are able to trade easily from any-
where just by pressing a ‘‘submit’’ button and where news articles move at the speed of
The Handbook of News Analytics in Finance Edited by L. Mitra and G. Mitra
#2011 John Wiley & Sons