| May 21, 2020
Trading strategies based on Asia Pacific news sentiment produced excess returns for up to a month ahead
Does news sentiment data work in the Asia Pacific region, and if so, what are the results from using it as the basis for a trading strategy? These were two of many questions the RavenPack Data Science team tried to answer in a recent white paper “Applying News Sentiment to Investment Strategies in Asia-Pacific Markets”.
To find the answers they backtested sentiment-based equity strategies on portfolios containing stocks from three broad regions: Australia & New Zealand, Japan, and Asia ex-Japan; as well as a pan-Asia-Pacific portfolio, that combined all the individual markets into one.
Buy and Sell signals were generated using scores from a daily company sentiment indicator built from RavenPack’s Event Sentiment Score (ESS) over a 24-hour lookback window.
The overall conclusion appeared to be that yes, news sentiment-based strategies did work in APAC, especially for short-to-medium term holding patterns, with the region as a whole producing Information Ratios close to 4.0, and delivering greater than 20% Annualized Returns.
Other key findings were as follows:
Researchers also compared the performance of long vs short signals and found short signals outperformed long over shorter holding periods, however, over longer holding periods performance tended to favour longs.
“Negative news tends to be more extreme, and the more extreme the sentiment, the greater the market impact.” Says Peter Hafez, Chief Data Scientist at RavenPack.”
A further focus was how well signals performed over longer investment horizons, with researchers finding that on a cumulative returns basis signals they continued to be successful for up to a month ahead.
Indeed, for Australia & New Zealand the optimal holding period seemed to be about a week, whilst APAC as a whole exhibited IRs greater than 1 for Mid/Large-Cap and 2.5 for Small-Cap for holding periods of up to a month.
One of the conclusions of the study was that decay was slower for the Small-Cap than for the Large/Mid-Cap, because of the former’s lower liquidity and slower incorporation of news information.
Another clear observation was that negative signals, while stronger, also decayed faster. This phenomenon was so prevalent that in many cases, and particularly for Small-Caps, a crossover was observed when moving towards longer trading horizons, as positive signals started to outperform.
Easily implement the results of this White Paper using the RavenPack Analytics Platform, which includes a comprehensive and high-quality database of news event and sentiment data on APAC stocks, available via dashboards or our web APIs. Request a trial today.
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