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How The Market Can Detect Its Own Mispricing - A Sentiment Index To Detect Irrational Exuberance

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Title: How The Market Can Detect Its Own Mispricing - A Sentiment Index To Detect Irrational Exuberance
Authors: Krinitz, Jonas
Alfano, Simon
Neumann, Dirk
Keywords: early warning indicator
Granger causality
irrational exuberance
news sentiment
sentiment index
Issue Date: 04 Jan 2017
Abstract: The emergence of big data analytics enables real \ time news analysis. Such analysis offers the possibility to instantly \ extract the sentiment conveyed by any newly published, \ textual information source. This paper investigates the existence \ of a causal relationship between news sentiment and stock \ prices. As such, we apply news sentiment analysis for unstructured, \ textual data to extract sentiment scores and utilize \ the Granger-causality test to determine the causal relationship \ between daily news sentiment scores and the corresponding \ stock market returns. Upon successfully identifying such a \ causal relationship with a time lag, we develop a real-time \ news sentiment index. This news sentiment index serves as \ a decision-support system in detecting a potential over- or \ undervaluation of stock prices given the news sentiment of \ available news sources. Thus, as a novelty, the news sentiment \ index serves as an early-warning system to detect irrational \ exuberance.
Pages/Duration: 10 pages
ISBN: 978-0-9981331-0-2
DOI: 10.24251/HICSS.2017.170
Rights: Attribution-NonCommercial-NoDerivatives 4.0 International
Appears in Collections:Machine Learning and Network Analytics in Finance Minitrack

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