5
How news events impact market sentiment
Peter Ager Hafez
ABSTRACT
News sentiment is shown to outperform 1-month price momentum when predicting future returns of the S&P 500. Market and industry-level sentiment indexes are constructed based on a bottom-up approach considering the impact of company-specific news events and their corresponding sentiment. As part of constructing the indexes, I show that company relevance and event novelty are important elements of a news-based strategy, since including only the most relevant and novel news stories results in improved information ratios. From May 2005 through December 2009, the strategies tested deliver double-digit positive returns in out-of-sample testing. In addition, I show how industry sentiment can add value when constructing market-neutral strategies taking long and short positions in top-ranked and bottom-ranked industries, respectively. Finally, I show that targeted directional exposures to top-ranked and bottom-ranked industries can improve a trading strategy beyond simple S&P 500 index exposures.
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