Leela Mitra and Gautam Mitra
ABSTRACT
A review of news analytics and its applications in finance is given in this chapter. In
particular, we review the multiple facets of current research and some of the major
applications. It is widely recognized news plays a key role in financial markets. The
sources and volumes of news continue to grow. New technologies that enable automatic
or semi-automatic news collection, extraction, aggregation and categorization are
emerging. Further machine-learning techniques are used to process the textual input
of news stories to determine quantitative sentiment scores. We consider the various
types of news available and how these are processed to form inputs to financial models.
We report applications of news, for prediction of abnormal returns, for trading
strategies, for diagnostic applications as well as the use of news for risk control.
1.1 INTRODUCTION
News (north, east, west, south) streams in from all parts of the globe. There is a strong
yet complex relationship between market sentiment and news. The arrival of news
continually updates an investor’s understanding and knowledge of the market and
influences investor sentiment. There is a growing body of research literature that argues
media influences investor sentiment, hence asset prices, asset price volatility and risk
(Tetlock, 2007; Da, Engleberg, and Gao, 2009; Barber and Odean, this volume, Chapter
7; diBartolomeo and Warrick, 2005; Mitra, Mitra, and diBartolomeo, 2009; Dzielinski,
Rieger, and Talpsepp, this volume, Chapter 11). Traders and other market participants
digest news rapidly, revising and rebalancing their asset positions accordingly. Most
traders have access to newswires at their desks. As markets react rapidly to news,
effective models which incorporate news data are highly sought after. This is not only
for trading and fund management, but also for risk control. Major news events can have
a significant impact on the market environment and investor sentiment, resulting in
rapid changes to the risk structure and risk characteristics of traded assets. Though the
relevance of news is widely acknowledged, how to incorporate this effectively, in
1
Applications of news analytics in finance:
A review
The Handbook of News Analytics in Finance Edited by L. Mitra and G. Mitra
#2011 John Wiley & Sons