Wednesday, December 21, 2011

News Sentiment: Highly Correlated with the S&P500

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As part of our ongoing research effort in this area, we continuously try to learn more about how to better capture sentiment trends at company, sector or market level. In this latest study, we have come up with a simple, intuitive, and yet robust approach to capture the sentiment trend on the US market. Below, we have shown the RavenPack Sentiment Index mapped against the cumulative return of the S&P500.
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Here are some of the key results from the study:

The RavenPack Sentiment Index Moves Closely with Financial Markets
  • From January 2000 to September 2011, the contemporaneous correlation between the RavenPack Sentiment Index and the S&P500 Index is 79%
  • The RavenPack Sentiment index is consistently highly correlated with the S&P500 Index across different market trends. Especially, we find an average correlation of almost 90% during bear markets
The RavenPack Sentiment Index is both Statistically and Economically Significant
  • A statistically significant causal relationship exists from market sentiment to stock market returns
  • The sentiment trading strategy based on monthly VAR(2) yields an annualized return of 10.2% between March 2000 to September 2011
  • The recursive monthly VAR(2) model is able to generate an out-of-sample annualized return of 6.7% between April 2006 and September 2011
  • The sentiment based trading strategy based on weekly VAR(10) yields an annualized return of 13.4% between March 2000 to September 2011
  • The recursive weekly VAR(10) model is able to generate an out-of-sample annualized return of 17.5% with an Information Ratio of 0.81

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