Factoring Sentiment Risk into Quant Models

Daily market news sentiment and stock prices

“…The results from this study show that the financial news sentiment factor adds significantly to the traditional asset pricing model and can be a relevant additional factor in asset pricing. Similar results were found in the recent studies by Cahan et al (2009) and Hafez and Xie (2012b) using the Ravenpack sentiment dataset. There are no previous studies either using the Ravenpack or TRNA datasets which study the effect of daily market sentiment on stock price returns using OLS and QR.…”

“…Investor sentiment has been proven to be a determinant of stock returns (Baker and Wurgler, 2006). Recent work by Hafez and Xie (2012b) examines the effect of investor's sentiment using news based sentiment, generated from the RavenPack Sentiment Index as a proxy for market sentiment in a multi-factor 3 model. They report a strong impact of market sentiment on stock price predictability over 6 and 12 month time horizons.…”

“…These so called multi-factor models are widely used by practitioners and fund managers to account for the risk factors in asset pricing. Cahan et al (2009) and Hafez and Xie (2012b) found that news sentiment as calculated by the RavenPack sentiment scores could add diversification benefits to the traditional factor models like CAPM or the other multi-factor models.…”

Machine News and Volatility

“…The research on this topic argues that news items from different sources influence investor sentiment, which feeds into asset prices, asset price volatility, and risk (Tetlock, 2007;Tetlock et al, 2008;Da et al, 2011;Barber and Odean, 2008;diBartolomeo and Warrick, 2005;Mitra, Mitra and diBartolomeo, 2009;Dzielinski et al, 2011). The diversification benefits of the information impounded in news sentiment scores provided by RavenPack have been demonstrated by Cahan et al (2009) and Hafez and Xie (2012), who examined its benefits in the context of popular asset pricing models.…”

“…Baker and Wurgler (2006) demonstrated a link between investor sentiment and stock returns. Recent work by Hafez and Xie (2012) examines the effect of investor's sentiment using news-based sentiment, generated from the RavenPack Sentiment Index as a proxy for market sentiment in a multifactor model. They report a strong impact of market sentiment on stock price predictability over six-and 12-month time horizons.…”