The Handbook of News Analytics in Finance

1.1 INTRODUCTION

News (north, east, west, south) streams in from all parts of the globe. There is a strong yet complex relationship between market sentiment and news. The arrival of news continually updates an investor's understanding and knowledge of the market and influences investor sentiment. There is a growing body of research literature that argues media influences investor sentiment, hence asset prices, asset price volatility and risk (Tetlock, 2007; Da, Engleberg, and Gao, 2009; Barber and Odean, this volume, Chapter 7; diBartolomeo and Warrick, 2005; Mitra, Mitra, and diBartolomeo, 2009; Dzielinski, Rieger, and Talpsepp, this volume, Chapter 11). Traders and other market participants digest news rapidly, revising and rebalancing their asset positions accordingly. Most traders have access to newswires at their desks. As markets react rapidly to news, effective models which incorporate news data are highly sought after. This is not only for trading and fund management, but also for risk control. Major news events can have a significant impact on the market environment and investor sentiment, resulting in rapid changes to the risk structure and risk characteristics of traded assets. Though the relevance of news is widely acknowledged, how to incorporate this effectively, in quantitative models and more generally within the investment decision-making process, is a very open question.

In considering how news impacts markets, Barber and Odean (this volume, Chapter 7) note “significant ...