The Handbook of News Analytics in Finance

13

Equity portfolio risk estimation using market information and sentiment

Leela Mitra, Gautam Mitra, and Dan diBartolomeo

ABSTRACT

Multifactor models are often used as a tool to describe equity portfolio risk. Naturally, risk is dependent on the market environment and investor sentiment. Traditional factor models fail to update quickly as market conditions change. It is desirable that risk model updates incorporate new information as it becomes available and for this reason diBartolomeo and Warrick (2005) introduce a factor model that uses option-implied volatility to improve estimates of a future covariance matrix. We extend this work to use both quantified news and implied volatility to improve risk estimates as the market sentiment and environment changes.