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News as a predictor of Returns


This presentation looks at stock returns of large cap Financial Services companies listed
across major stock exchanges around globe and weigh its performance against the
market news indicators as calculated by Infotrie.
For the purpose of our analysis we have considered News Sentiment Data provided by
Infotrie within the time period (1 Jan, 2013 19, May, 2014) and have assessed
equities from NASDAQ, NYSE, Tokyo Stock Exchange and Paris Stock Exchange.
In this presentation we also attempt at establishing a deeper understanding of how
news trends work, specifically we will look at how Infotries Buzz Index can be a
significant indicator of stock returns trend over look back periods of 1,2 and 3 months.

Before we start looking at a detailed stock wise analysis we would like to mention
certain key points and coin certain hypothesis that the reader can later observe in this
paper.

News as a predictor of Returns


Buzz scores are nothing but normalized values of news volume over the past 7 days in the
range 0 through 10, in simpler words the reader may consider it to be rate of change of news
volume over past 7 days.
Inference: Buzz scores may not good immediate indicators when considering wider look-back
windows, they positively forecast a trend in returns, specifically a downward trend.
Hypothesis: They represent the decay or rise in news volume thus reflecting the markets
interest or indifference. Interest helps a stock rise and indifference does the opposite.
Sentiment: Ranges from 0 to 10. Values above 5 deemed as bullish while lower values are
bearish indicators.
News Volume: The higher, the more in-the-news a company is.
We correlated the Prices with Periodic Buzz, Volumes and Sentiment to pick up those with
significant relationships (>40%). These companies will then be further analysed to determine if
our hypothesis were true. In our research, we analysed 16 companies but in the interest of
being succinct, will only discuss 3 in this post. The full report will be available upon request.

News as a predictor of Returns


Buzz scores are nothing but normalized values of news volume over the past 7 days in the
range 0 through 10, in simpler words the reader may consider it to be rate of change of news
volume over past 7 days.
Inference: Buzz scores may not good immediate indicators when considering wider look-back
windows, they positively forecast a trend in returns, specifically a downward trend.
Hypothesis: They represent the decay or rise in news volume thus reflecting the markets
interest or indifference. Interest helps a stock rise and indifference does the opposite.
Sentiment: Ranges from 0 to 10. Values above 5 deemed as bullish while lower values are
bearish indicators.
News Volume: The higher, the more in-the-news a company is.
We correlated the Prices with Periodic Buzz, Volumes and Sentiment to pick up those with
significant relationships (>40%). These companies will then be further analysed to determine if
our hypothesis were true. In our research, we analysed 16 companies but in the interest of
being succinct, will only discuss 3 in this post. The full report will be available upon request.

1. Berkshire Hathaway Inc. (BRK) [NYSE]

The table above gives us an idea that BRK is in the news


firm with a relatively bullish sentiment and a low buzz
score implying a relatively stable news volume. Our
correlation analysis suggest that we can observe that most
significant indicator to be Buzz index over weekly and
monthly intervals. Lets see:

Fig 2: Weekly and biweekly returns v/s respective buzz momentum


From Fig 2 we can observe value of returns having a healthy correlation with buzz scores
as calculated and we can specifically point out that decay in buzz score are significantly
related falling returns.

3: Monthly returns v/s SMA_60 and Buzz_60


From the above figure we can say the buzz momentum
follows a pattern similar but more precise than the pattern
in Fig 2 thus strengthening our hypothesis.

2. American Express Company (AXP) [NYSE]

Essentially AXP has a bullish average sentiment with


significant news volume. While at first glance it seems
similar to Berkshire Hathaway (BRK), AXP is more volatile
and has a positive correlation between simple moving
averages (SMA) of Price and periodic Time values (unlike
BRK). Thus, we find this worth observing.

Fig 6: Returns_90, Buzz_90 and SMA_90


Figure 6 reflects of a decay scenario where decaying value of Buzz_90 relates to a steep
decay in returns. We believe the steep decay has more to do with volatility rather than
the magnitude of decay of buzz.

3. Capital One Finance (COF) [NYSE]

COF offers a rather contradictory picture to our


hypothesis. In this scenario, Buzz_90 is negatively
correlated to 90-day returns. The most significant indicator
was the 90-day volume, which also had a negative
correlation to returns. From figure 7 below, we can
conclude that this appears to be a non-causal relationship
from the following figure.

Fig 7: Returns_90 and NewsVolume_90

Conclusion
If we consider companys data samples to be a probabilistic
hypothesis testing mechanism, our initial hypothesis regarding
Buzz scores holds true 11 times out of 16.
Empirically we also saw that returns (60-90 days) for equities
with a large news volume are more significantly correlated to
the decaying Buzz values over 60-90 day look back windows
while those with marginal or negligible news volume were
related to upward as well as downward buzz trend.

One may have also noticed a marginal correlation between


sentiment scores and returns over small periods (up to 2
weeks) which is consistent with SMA values reflecting generic
correlations over small intervals of time.

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