RavenPack | November 17, 2020
In this study, RavenPack data scientists sought to isolate and quantify the additional value provided by news sentiment both by itself and on top of other more traditional factors in trading Asia Pacific equities.
Whether news sentiment - aggregated from online news stories and social media posts - could enhance a traditional multi-factor Asia Pacific (APAC) equities portfolio quantitative investment strategy (QIS), was the subject of this White Paper.
Researchers began by constructing a News Sentiment Index to analyze the effectiveness of sentiment on its own; in step 2 they would seek to test how well it performed as an overlay to a traditional factor QIS.
The Index used sentiment measured over a variety of smoothing periods, ranging from 1 week to 90 days (3 months) to analyze the impact of both short-term and longer-term sentiment.
Differing portfolio rebalancing periods were also experimented with from daily to monthly.
The Sentiment Index’s signals were then applied to a long-short, market, and factor neutralized APAC equities portfolio.
The results were overall promising. The index smoothed over a 90-day period, with monthly rebalancing, delivered an IR above 0.7 and an Annualized Return above 400bps for an AUM of $1B, with an Annualized Turnover under 1500%.
Next, researchers wanted to see whether the signals derived from sentiment could enhance a multi-factor QIS and if so by how much?
The traditional multi-factor framework for Asian markets consisted of Momentum, Low Size, Low Volatility, Growth, Value, and Quality factors.
An analysis using MSCI’s GEM3 model factor exposures framework suggested sentiment was fairly uncorrelated to other factors, “especially over the short aggregation windows, which correspond to the fastest signals.” According to Peter Hafez, Chief Data Scientist at RavenPack. This held out the promise sentiment could add value.
With the addition of sentiment, multi-factor models showed consistent improvement. As an overlay to a $1B AUM strategy, sentiment increased the IR by 64%, from 0.45 to 0.74, and the Annualized Return by 35%, from 167bps to 225bps. A further advantage of the multi-factor approach was the lighter turnover and slightly larger portfolio sizes.
Please use your business email. If you don't have one, please email us at firstname.lastname@example.org.
By providing your personal information and submitting your details, you acknowledge that you have read, understood, and agreed to our Privacy Statement and you accept our Terms and Conditions. We will handle your personal information in compliance with our Privacy Statement. You can exercise your rights of access, rectification, erasure, restriction of processing, data portability, and objection by emailing us at email@example.com in accordance with the GDPRs. You also are agreeing to receive occasional updates and communications from RavenPack about resources, events, products, or services that may be of interest to you.
Your request has been recorded and a team member will be in touch soon.
Schedule a personalized trial to see how our actionable insights can boost your investment strategies.