The Book of Alternative Data

CHAPTER 2The Value of Alternative Data

2.1 INTRODUCTION

One key question in the discussion about alternative data is how to assign value to it. This needs to be addressed from the perspectives of both data consumers and data producers. Data is only valuable from the perspective of a data consumer if it can be monetized, directly or indirectly. From the viewpoint of a data vendor, the cost of creating and distributing the dataset needs to be recouped when selling it. The data vendor would of course also want to add margin on it, when selling it.

In this chapter, we discuss this topic in some detail and show some directions to help value alternative data. We note that at the moment of writing there is still no solution to the problem of how to find the “right” price to assign to a dataset. The development of marketplaces where market participants can converge to one price is still at its infancy and, given the nature of what data is, many challenges still remain open, as we will shortly discuss. We will also show that having a standardized marketplace might not be the economically optimal solution for a data vendor.

2.2 THE DECAY OF INVESTMENT VALUE

Data, alternative or not, is ultimately used in investing and risk management to make predictions. In the investment space, if all or most of the market participants make the same prediction based on the same information, they can trade on it and opportunities could quickly disappear. The Efficient Market Hypothesis (EMH) in its ...