The Handbook of News Analytics in Finance

6.7 US PORTFOLIO SIMULATION USING NEWS ANALYTIC SIGNALS

Event studies are screening methods that show potential value, but they are in “event time”, while portfolios are managed in “calendar time”. It is instructive to attempt realistic portfolio construction using only RNSE event data for extreme sentiment days. Of course, a professional portfolio manager would incorporate these RNSE event data into her arsenal of other investment ideas and information sources, but it is instructive to see if even simple portfolio construction techniques using only news data can perform.

6.7.1 Investment hypothesis

The investment hypothesis under consideration is that it takes market participants a long time (days) to process a large amount of novel, strongly polar news, as suggested by the event studies. News and event ambiguity, fact validation, cognitive dissonance are all good reasons to hypothesize that investors can take a longer time to process new information that has extreme sentiment.

Behavioral response to information is what is happening here. Issues of herding, cross-validation, overreaction and underreaction, cognitive dissonance, and attention all come into play.

It is instructive to attempt realistic portfolio construction using only RNSE event data for extreme sentiment days. Of course, a serious portfolio manager would incorporate RNSE event data into her arsenal of other investment ideas and information sources, but it is instructive to see if even simple portfolio construction ...