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News Beta - A New Measure for Risk & Stock Analysis

Published Date: October 30, 2010
Author: Peter Ager Hafez

Brief:

The study provides insights into how RavenPack News Analytics can measure the responsiveness of a company's stock price to changes in a sentiment benchmark derived from financial news.

Abstract:

Similar to the beta in CAPM, this paper introduces the concept of news beta to measure the responsiveness of a company's stock price to a market benchmark. While beta from CAPM only considers market returns, news beta tries to capture the underlying factors that drive prices typically reported in financial news. This study shows that positive news beta stocks on average outperform the market, while negative news beta stocks tend to underperform. Beyond using news beta as an additional risk measure, I find that in a long/short trading strategy, going long positive news beta stocks and short negative news beta stocks yields a positive return spread over a 10 year back-testing period. Finally, I show how it is possible to improve a regime-shift detection strategy by tracking the ratio of negative to positive news beta stocks. Trading the S&P 500 index either long or short based on such strategies, I obtain an information ratio of approximately 1.0 with annualized returns of 16 percent and a monthly hit ratio above 65 percent.
   
 

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