For a company to be classified a positive or negative news beta company, its stock price must have moved with or against a market sentiment benchmark in the time period of the previous regression window.
Previously, I showed how a long-short news beta strategy delivered positive returns in 9 out of 11 years. Such results were obtained going long positive news beta stocks, and short negative news beta stocks over a one month investment horizon. The performance of the different long-only portfolios are depicted below in Figure 1.
As can be observed, going long the portfolio of positive news beta stocks improves the Information Ratio by 20% compared to the benchmark; but also adds additional diversification to the overall portfolio via a reduced correlation to the market (about 90%).
Figure 1: Out-of-sample mean cumulative returns for a Top 10 positive, Top 10 negative, and zero news beta portfolio covering the constituents of the S&P 500. For benchmark purposes, the performance of the S&P 500 (equally weighted) has been included. News betas have been calculated based on a 6 month regression, a 3 month sentiment aggregation window, and a 1 month investment horizon.
With a monthly two-way turnover of about 100%, a long-only news beta strategy may be considered as a standalone signal or as an overlay to an existing model, for instance as a market exposure tilt.
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