Social media and news sentiment analysis for advanced investment strategies

Abstract

Themotivation of this chapter hinges on the growing popularity in the use of news and social media information and their increasing influence on the financial investment community. This chapter investigates the interplay between news/social sentiment and financial market movement in the form of empirical impact. The underlying belief is that news and social media influence investor sentiment, which in turn drives financial decisions and predicates the upward or downward movement of the financial markets. This book chapter contributes to the existing literature of sentiment analysis in the following three areas: (a) It provides a review of existing findings about influence of social media and news sentiment to asset prices and documents the persistent correlation between media sentiment and market movement. (b) It shows that abnormal news sentiment can be a predictive proxy for financial market returns and volatility, based on the intuition that extreme investor sentiment changes tend to have long and last effects to market movement. (c) It presents a number of approaches to formulate investment strategies based on the sentiment trend, shocks and feedback strength. The results show that the sentiment-based strategies yield superior risk-adjusted returns over other benchmark strategies. Altogether, this chapter provides a framework of existing empirical knowledge on the impact of sentiment on financial markets and further prescribes advanced investment strategies based on sentiment analytics.