The Handbook of News Analytics in Finance

10.5 CONCLUSIONS

Recognizing and responding to changes in the level of risk of financial instruments and financial markets is an essential survival skill for investors in a competitive world: “To finish first, you first must finish.” Measuring the volume and sentiment of information being delivered to financial market participants is an ideal way to promptly adjust our expectations of risks over short horizons. News is the very essence of answering the question, “How are things different now than they usually are?”

However, the incorporation of news and other state variables into our assessments of risk means that we must address some of the important statistical complexities of financial asset returns and utilize a framework which optimally uses the information we are able to obtain. Such methods have been put forward and are available to investors for use in their risk assessment procedures.

Utilization of news analytics in risk assessment also brings its own dangers. News analytics effectively brings greater ability to assess changes in absolute risk levels over short time horizons, but it also brings the temptation to focus the risk management process on these newly refined measures, irrespective of whether such measures are the most relevant to our actual financial circumstances.