By Wancheng Zhang
Stocks prices respond to news. In recent years, social media had played a more and more important role in affecting stock prices. However, it is challenging to make alphas with news. As unstructured data often includes text and multimedia content, news cannot be understood directly by computer. This chapter gives an overview on finding alphas by using news and social media.
It is not easy for machines to accurately parse and interpret the meaning of the news. Similar to other areas in statistical arbitrage, an algorithm gains advantages in response to speed and coverage, but loses accuracy. Nowadays, trading firms can analyze the news within 1 millisecond and make trading decisions instantly. Big news usually causes large price movement instantly, and sometimes, with overshoot, it reverses later.
Since 2007, the application of sophisticated linguistic analysis of the news and social media has grown from an area of research into mature product solutions. Professional data vendors use sophisticated algorithms to analyze news and deliver the result in real time. News analytics and news sentiment are widely used by both buy-side and sell-side institutions in alpha generation, trading, and risk management.
Simply speaking, sentiment measures the quality of news. The basic sentiment looks at the polarity of the news: good, bad, or neutral. More advanced sentiment analysis can further express more ...