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Using Sentiment Analysis to Navigate the Italian Government Bond Market

Italian Government Bonds (BTPs) are amongst the most important bond instruments globally. The spread between BTPs and German government bonds (Bunds) is not only an important indicator for the overall risk sentiment in financial markets, it also affects the portfolios of a lot of investors.

We investigate how sentiment analysis can help an investor navigate the Italian government bond markets. We take a look at the last four years, a time period when quantitative easing by central banks was less pronounced than straight after the GCF of 2007/2008.

Sentiment Adds Value for Portfolio Managers

We focus on news related to the Government of Italy and Italy in general and there we filter out all news that is not related to credit to reduce the noise in the data. Then an indicator is constructed, making sure that it is not easily moved by singular news stories yet sensitive enough to react quickly. Using this indicator we look at a simple investment as well as a simple trading strategy to test the quality of the signal.

Overall the results are encouraging with the two sentiment-based strategies out-performing a simple buy-and-hold.

In the tables below, we include the "always long" strategy where one buys BTPs on the first day and keeps them for the entire period. This would not have worked well as the spreads widened in both periods.

Long Strategy Italian Bonds

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