The Handbook of News Analytics in Finance Edited by L. Mitra and G. Mitra
#2011 John Wiley & Sons
Alexander D. Healy and Andrew W. Lo^1
ABSTRACT
As financial markets grow in size and complexity, risk management protocols must also
evolve to address more challenging demands. One of the most difficult of these chal-
lenges is managing event risk, the risk posed by unanticipated news that causes major
market moves over short time intervals. Often cited but rarely managed, event risk has
been relegated to the domain of qualitative judgment and discretion because of its
heterogeneity and velocity. In this chapter, we describe one initiative aimed at solving
this problem. The Thomson Reuters NewsScope Event Indices Project is an integrated
framework for incorporating real-time news from the Thomson Reuters NewsScope
subscription service into systematic investment and risk management protocols. The
framework consists of a set of real-time event indices—each one taking on numerical
values between 0 and 100—designed to capture the occurrence of unusual events of a
particular kind. Each index is constructed by applying disciplined pattern recognition
algorithms to real-time news feeds, and validated using econometric methods applied to
historical data.
3.1 INTRODUCTION
As financial markets grow in size and complexity, risk management protocols must also
evolve to address more challenging demands. One of the most difficult of these chal-
lenges is managing ‘‘event risk’’, the risk posed by unanticipated news that causes major
market moves over short time intervals. Examples include terrorist events like Septem-
ber 11, 2001, contagion effects like the Quant Meltdown of August 7–9, 2007, and
system glitches like the ‘‘Flash Crash’’ of May 6, 2010. Often cited but rarely managed,
event risk has been relegated to the domain of qualitative judgment and discretion
3
Managing real-time risks and returns:
The Thomson Reuters NewsScope
Event Indices
(^1) The views and opinions expressed in this chapter are those of the authors only, and do not necessarily represent the views and
opinions of AlphaSimplex Group, MIT, or any of their affiliates and employees. The authors make no representations or
warranty, either expressed or implied, as to the accuracy or completeness of the information contained in this chapter, nor are
they recommending that this chapter serve as the basis for any investment decision—this chapter is for information purposes
only. This research was supported by AlphaSimplex Group, LLC and Thomson Reuters.