Web News Analytics Enhance Stock Portfolio Returns

RavenPack | January 15, 2014

In this paper we explore the characteristics of RavenPack’s new data set derived from online public sources of financial news and opinion compared to content published by Dow Jones & the Wall Street Journal.

Executive Summary:

In this study, we explore the characteristics of RavenPack’s new data set derived from online sources of financial news and opinion compared to the real-time content published by Dow Jones & the Wall Street Journal. Overall, we find the web is catching up in terms of reporting novel corporate events. Adding web sources improves both company and event coverage. By intersecting company sentiment from RavenPack’s Dow Jones Edition and the new Web Edition, we show how to improve a simple reversal strategy. Our study examines all Russell 3000 constituents using a 1-week investment horizon.

Combining premium newswire services with broader web content significantly improves return predictability:

  • The Dow Jones and Web Editions of RPNA each contain valuable information when predicting future stock price movements
  • Including web content in a short-term reversal strategy reduces signal turnover leading to an improvement in Information Ratio of up to 70%
  • By intersecting the Dow Jones and Web Edition trading signals, the Information Ratio on our reversal strategy increases slightly from 1.0 to 1.1 (from 0.9 to 1.0) while cumulative return increases significantly from 60.3% to 83.7% (from 51.3% to 69.4%) for Russell 2000 (Russell 3000) stocks

Web News Analytics Enhance Stock Portfolio Returns [White Paper]


Enhance Stock Portfolio Returns

1. Introduction

RavenPack has recently enhanced its flagship RavenPack News Analytics (RPNA) product with over 22,000 online sources of financial news and opinion. RavenPack News Analytics Version 3.X now includes 7 years of historical data from web publications and blogs – adding to the 14-year archive of Dow Jones newswire content. The event count for the Web Edition, as the data from web content is known, has increased significantly in recent years and generates over 2 times more events than Dow Jones in 2013. Generally, the Web Edition has more news events across most groups. The web content not only increases the overall event count, but also potentially improves timeliness and provides new informational content.

Before tapping into the additional news sources, at least two questions are of paramount interest: (1) whether the different new sources contain value on their own; and (2) whether the new Web sources complement the existing Dow Jones newswire content. To answer these questions, this study conducts a horse race comparison between a set of company sentiment indicators generated from the Dow Jones Edition and the Web Edition.

Using one of RavenPack’s company sentiment indicators as a signal overlay on a simple short-term reversal model, we find that (1) the Dow Jones and Web Editions each contain valuable information in terms of future return predictability; and (2) the Web Edition has complementary value beyond the Dow Jones dataset.

In the following section, we provide a brief overview of the data used in this paper. In Section 3, we present the key statistics for the Dow Jones and Web Editions of RavenPack News Analytics 3.X. In Section 4, we review the company sentiment indicator methodology applied in this study. Section 5 evaluates the return predictability of the indicators generated from Dow Jones, Web, and the intersection of both versions under the framework of the short-term reversal model. Finally, in Section 6 we present our conclusions.

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