impactrealizedforeign exchange volatility. He further considers the relationship of the
indices toimplied volatility. The NEI volatility indices are constructed to predict
volatility over 30-minute periods. Implied volatility gives the markets’ expectations of
volatility over a much longer horizon, typically 30 days. Event study analysis between
implied volatility and the NEI volatility indices shows no evidence of a relationship.
Lo feels that implied volatility and the indices may function as complementary sources
of information for risk management, since they intrinsically focus on different time
horizons.
1.4 MODELS AND APPLICATIONS
News analytics in finance is the use of technology and algorithms to process news within
the investment management process. It allows investors to update their beliefs about the
future market environment more effectively. This technology may be geared towards
human decision support or it may be used to create automated quantitative strategies.
The use of news data in addition to historic market data makes models more proactive
and less reactive. The applications broadly fall into two areas: trading and risk control.
1.4.1 Information flow and computational architecture
News analytics in finance focuses on improving IT-based legacy system applications.
These improvements come through research and development directed at automating/
semi-automating programmed trading, fund rebalancing and risk control applications.
The established good practice of applying these analytics in the traditional manual
approach are as follows. News stories and announcements arrive synchronously and
asynchronously. In the market, asset (stocks, commodities, FX rates, etc.) prices move
(market reactions). The professionals digest these items of information and accordingly
make trading decisions, investment decisions and recompute their risk exposures.
Applications of news analytics in finance: A review 17Figure 1.7.Distribution of pre- and post-event squared returns in bold and faint lines.