| April 21, 2020
News sentiment data can still enhance alpha strategies and provide downside protection during periods of intense volatility.
As the coronavirus outbreak spreads around the world, we have gone far beyond just a health crisis, with people self-isolating at home or complying with state-forced lockdowns. Businesses have suffered, and have had to either close or scale down as a consequence, thus impacting real jobs and the economy. News continues to play a key role in staying informed about the current state of the crisis, influencing both market sentiment and asset prices.
News Sentiment Data outperform random portfolio strategies during the three crisis periods, showing strong statistical significance
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While both negative and positive sentiment has proven predictive for future asset prices, the former tends to have a greater impact. Due to the presence of more negative news during crisis periods, it seems reasonable to assume that news sentiment should work well during such times.
In our latest paper, we look at three significant drawdown periods: the Global Financial Crisis of 2008-09, the China-driven selloff of 2015-16 including the Greek debt crisis and the devaluation of the Renminbi, and finally, the 2020 Coronavirus health crisis.
We show that sentiment-driven strategies outperform during all of these volatile periods. We validate this by running two flavors of backtest strategies on long-short, market-neutral portfolios, constructed using the RavenPack sentiment signal.
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