David Leinweber and Jacob Sisk
ABSTRACT
News analytics measure the relevance, sentiment, novelty, and volume of news. They
combine natural language analysis of content with historical and news metadata. Signals
from analytics of this type have been shown to be predictive of volatility. Aggregation
and filtering of news events can also generate alpha signals for portfolio management.
Filters use thresholds set using both absolute and relative measures. This detects
investor behavior associated with accumulation of information and changes in senti-
ment. The analytics described are used to generate investment signals. In practice, they
would be combined with forecasts from other quantitative or research sources
(e.g., factor, momentum, and earnings). In this chapter, we analyze investment signals
derived only from news, an important distinction. Event studies on a broad universe of
US equities (segmented by sector and capitalization class) are shown for the period
2003–2008. US portfolio simulation results are shown for these signals applied over
2006–2009. The portfolio simulation, like the event studies, is based on a ‘‘pure news’’
signal, without mixing in other quant signals, which can confuse the question of alpha
from news. Both the event studies and portfolio simulation show evidence of exploitable
alpha using news analytics.
6.1 INTRODUCTION
Alpha hunters are always looking for new territory. When a strategy becomes known
and used by too many players, the collective market impact of getting in and getting out
squeezes out all the profit, and only the lowest cost transactors will be able to use it. The
pack needs to move on.
Textual information is promising new territory. Bill Gross, of the PIMCO investment
management company, described equity valuation as ‘‘that mysterious fragile flower
where price is part perception, part valuation, and part hope or lack thereof.’’ An old
Wall Street proverb says, more tersely, ‘‘Stocks are stories, bonds are mathematics.’’
This has enough truth in it that looking for the right stories is a worthwhile activity.
Modern high-end newsfeeds are designed to facilitate technology-intensive methods in
The Handbook of News Analytics in Finance Edited by L. Mitra and G. Mitra
#2011 John Wiley & Sons