The digitalization of news and social media provides an unprecedented source to investigate the role of information on market dynamics. However, the observed sentiment time-series rep- resent a noisy proxy of the true investor sentiment. Moreover, modeling the joint dynamics of different sentiment series can be beneficial for the assessment of their economic relevance. The main methodological contribution of this paper is twofold: i) we filter the latent sentiment sig- nals in a genuinely multivariate model; ii) we propose a decomposition into a long-term random walk component, named long-term sentiment, and a short-term component driven by a station- ary Vector Autoregressive process of order one, named short-term sentiment. The proposed framework is a dynamic factor model describing the joint evolution of the observed sentiments of a portfolio of assets. Empirically, we find that the long-term sentiment co-integrates with the market price factor, while the short-term sentiment captures transient and firm-specific swings. By means of quantile regressions, we assess the significance of the explanatory power of filtered present sentiment on future returns. Then, we demonstrate how the lagged relation can be successfully exploited in a portfolio allocation exercise.

A tale of two sentiment scales: Disentangling short-run and long-run components in multivariate sentiment dynamics

Vassallo, Danilo;Bormetti, Giacomo;Lillo, Fabrizio
2022

Abstract

The digitalization of news and social media provides an unprecedented source to investigate the role of information on market dynamics. However, the observed sentiment time-series rep- resent a noisy proxy of the true investor sentiment. Moreover, modeling the joint dynamics of different sentiment series can be beneficial for the assessment of their economic relevance. The main methodological contribution of this paper is twofold: i) we filter the latent sentiment sig- nals in a genuinely multivariate model; ii) we propose a decomposition into a long-term random walk component, named long-term sentiment, and a short-term component driven by a station- ary Vector Autoregressive process of order one, named short-term sentiment. The proposed framework is a dynamic factor model describing the joint evolution of the observed sentiments of a portfolio of assets. Empirically, we find that the long-term sentiment co-integrates with the market price factor, while the short-term sentiment captures transient and firm-specific swings. By means of quantile regressions, we assess the significance of the explanatory power of filtered present sentiment on future returns. Then, we demonstrate how the lagged relation can be successfully exploited in a portfolio allocation exercise.
Settore SECS-S/06 - Metodi mat. dell'economia e Scienze Attuariali e Finanziarie
Investment analysis; Sentiment analysis; Kalman filter; expectation maximization; quantile regressions
Horizon 2020
871042
File in questo prodotto:
File Dimensione Formato  
Sentiment_paper_final_QF.pdf

embargo fino al 30/04/2024

Tipologia: Accepted version (post-print)
Licenza: Creative commons
Dimensione 976.04 kB
Formato Adobe PDF
976.04 kB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11384/124682
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact