Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword or section
Like this
2Activity
P. 1
Deutsche Bank Whitepaper on Signal Processing

Deutsche Bank Whitepaper on Signal Processing

Ratings: (0)|Views: 897|Likes:
Published by zxps9998712
News Drift
News Drift

More info:

Published by: zxps9998712 on Jun 18, 2013
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

02/14/2014

pdf

text

original

 
Deutsche BankMarkets Research
North America
United States
Quantitative Strategy
Signal Processing
 
Date
17 December 2012
Quant 3.0
Trawling the web for new alpha opportunities ________________________________________________________________________________________________________________Deutsche Bank Securities Inc.Note to U.S. investors: US regulators have not approved most foreign listed stock index futures and options for USinvestors. Eligible investors may be able to get exposure through over-the-counter products. Deutsche Bank does andseeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only asingle factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED INAPPENDIX 1.MICA(P) 072/04/2012.
Rochester Cahan, CFArochester.cahan@db.com Zongye Chen john.chen@db.com Yin Luo, CFAyin.luo@db.comMiguel-A Alvarezmiguel-a.alvarez@db.com Javed Jussa javed.jussa@db.comSheng Wangsheng.wang@db.com North America: +1 212 250 8983Europe: +44 20 754 71684Asia: +852 2203 6990
 
This is our third report in a series of papers studying the use of unstructureddata in stock selection. In this paper we propose three ways to enhancetraditional quant signals by overlaying information from unstructured web andnews data.Casting the net widerThe web is a challenge and an opportunity for quantitative investors. For adata-driven discipline like ours, the vast volume of data available online is apotential gold mine. But like all mining, getting at the treasure is harder than itlooks. In this research we use a new database of internet and social mediasentiment to try to untangle the web into something useful for systematicinvestors.Use web and news flow to condition simple quant factorsWe show how simple price-based strategies like momentum and reversal areclosely tied to web and news flow. Reversal factors work much better in stockswith little or no news, whereas momentum is more effective when there is alot of news about a stock.News-aware momentum and reversal factorsUsing these results, we suggest simple but effective ways to improvemomentum and reversal by using the volume of web and news mentions to tiltthe signal towards parts of the universe where it will be the most effective.
 
17 December 2012Signal ProcessingPage 2 Deutsche Bank Securities Inc.
 
Table Of Contents
A letter to our readers .................................................................... 3
 
Harnessing unstructured data in quantitative strategies ................................................... 3
 
The story so far ............................................................................... 4
 
Part three in an ongoing research series ........................................................................... 4
 
Why the web? ................................................................................ 7
 
Is it really so different from financial newswires? ............................................................. 7
 
Backtesting analysis ..................................................................... 15
 
Monthly backtesting ......................................................................................................... 15
 
Weekly backtesting .......................................................................................................... 18
 
Summary of backtesting results ...................................................................................... 20
 
Case Study 1: News and reversal ................................................. 22
 
Using news and the web to enhance reversal strategies ................................................ 22
 
Case Study 2: News and the lottery factor................................... 29
 
Enhancing another type of reversal ................................................................................. 29
 
Case Study 3: News and momentum ........................................... 31
 
Can news flow enhance momentum too? ....................................................................... 31
 
News-aware reversal and momentum ......................................... 33
 
Building better reversal and momentum signals ............................................................. 33
 
All publicity is good publicity? ...................................................... 35
 
Conclusion ........................................................................................................................ 38
 
References .................................................................................... 39
 
 
17 December 2012Signal ProcessingDeutsche Bank Securities Inc. Page 3
 
A letter to our readers
Harnessing unstructured data in quantitative strategies
The next frontierMany of you have been following our research for a number of years now, so most ofyou will no doubt recall that unstructured data is one of our favorite topics. This reportis our third on the topic since we launched our quant research here at Deutsche Bank.In our first report in the series, way back in 2010, we showed how to use non-linear,learning models to convert news sentiment into an alpha signal. Last year we expandedour analysis to web data and showed that co-mentions of two companies on the webcan be a useful way to uncover relationships between companies that often transcendthe usual sector or industry lines. In this report, we combine news and web sentimentinto one data set via an interesting new database: Thomson Reuters News Analytics forInternet News and Social Media. This database uses the same natural languageprocessing algorithms that are used in the Thomson Reuters News Analytics database.The beauty of this is that it allows us to make a fairer comparison between the twocontent sets, while keeping the sentiment algorithms constant.Living up to its promise?When we first started researching news sentiment signals in early 2009, newssentiment and natural language processing was the one of the hottest topic in quant.However, as the initial buzz died down, uptake among quantitative investors has beenslower than many expected, at least at the longer-term end of the rebalancing curve.Does this mean news sentiment has been a flop? We don’t think so. However, we dothink there is perhaps a mismatch between expectations and reality. Often, when a newdata source shows up, quants (ourselves included) breathlessly expect it will addinstant alpha to their models – the fabled “orthogonal alpha source”. In reality it isnever so easy. If alpha came off the shelf in a pretty shrink-wrapped box, therewouldn’t be much for us to do every day. News sentiment, like any data set, requires agreat deal of effort to find ways it can add value.If there is a common theme that runs through all our research on this topic, it is thatone needs to do more than just buy positive sentiment stocks and sell negativesentiment stocks. While this is an obvious starting point – indeed it is where we start inthis report – we do want to encourage quants to look deeper than this. Sentiment, likeany quantity tied to human emotions, is a complex beast. A story could have verypositive sentiment linguistically, but if it is less positive than the market expected itcould lead to a negative price reaction. We think textual sentiment needs to beevaluated in the context of the market reaction to that sentiment, and indeed thelearning models we have proposed in the past try to do exactly this.Web and news flow as a conditioning toolIn this paper we suggest some additional ways to use web and news data in quantinvesting. We show how news flow is a useful conditioning tool for simple, price-basedstrategies like momentum and reversal. Even though the web and news data sets arecomplex, the strategies we suggest are simple but effective.Regards, Yin, Rocky, Miguel, Javed, John, and Sheng
Deutsche Bank Quantitative Strategy
 

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->