Mitigating Risk Using RavenPack Analytics: A Research Roundtable

February 09, 2021

A growing corpus of research shows that news analytics data has proven useful in forecasting market volatility

Seemingly unexpected market turmoil exemplified by the recent downturn during the Coronavirus crisis has led many investors to focus on enhancing risk management.

A growing corpus of research shows that one source that can help them is news analytics data, a subset of alternative data, that has proven useful in forecasting market volatility.

Prepared by RavenPack's data science team, this whitepaper takes the form of a discussion of a selection of the research on the subject and its applications to various asset classes, including stocks, bonds, and credit.

Below are some of the key takeaways:

  • The news is independent and timely when compared to other variables - two key reasons why its integration into risk-modeling can produce more accurate results.

  • News sentiment and volume metrics are useful in forecasting equity volatility and demonstrate important explanatory power, especially when linked to investor type (retail vs institutional) and attention.

  • News analytics can uncover companies with ties through article co-mentions and these can be bundled into ‘network graphs’ to provide differentiated insights around company relationships and for appraising joint risk.

  • The observed spill-over effect from firm-level news and news about broader market drivers can be incorporated as important elements in beta forecasting and in managing the cross-sectional and time-varying properties of systematic risk.

  • Adverse market movements in corporate bonds are negatively correlated to the flow of news suggesting that analyzing news volume can help investors anticipate bond liquidity risk more accurately.

  • News analytics can provide an augmentative approach for assessing the quality of credit ratings, overall company creditworthiness and future relative performance of highly distressed firms.

  • The analysis of news covering negative-ESG events correlates with companies’ ability to manage ESG criteria, with implications for their credit-worthiness and ESG portfolio risk monitoring.

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