The Handbook of News Analytics in Finance

3.1 INTRODUCTION

As financial markets grow in size and complexity, risk management protocols must also evolve to address more challenging demands. One of the most difficult of these challenges is managing “event risk”, the risk posed by unanticipated news that causes major market moves over short time intervals. Examples include terrorist events like September 11, 2001, contagion effects like the Quant Meltdown of August 7–9, 2007, and system glitches like the “Flash Crash” of May 6, 2010. Often cited but rarely managed, event risk has been relegated to the domain of qualitative judgment and discretion because of its heterogeneity and velocity. If we cannot measure it, we cannot manage it, and text-based news is hard to quantify.

In this chapter, we describe one initiative aimed at solving this problem. The Thomson Reuters NewsScope Event Indices Project is an integrated framework for incorporating real-time news from the Thomson Reuters NewsScope subscription service into systematic investment and risk management protocols. The framework consists of a set of real-time event indices—each one taking on numerical values between 0 and 100—designed to capture the occurrence of unusual events of a particular kind. For example, the Macro index measures the real-time quantity of macroeconomic news, and the NatDist index measures the real-time quantity of natural disaster news. Each index is constructed by applying disciplined pattern recognition algorithms to real-time news-feeds, and ...