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

Date
2017-01-04
Authors
Krinitz, Jonas
Alfano, Simon
Neumann, Dirk
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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.
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early warning indicator, Granger causality, irrational exuberance, news sentiment, sentiment index
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10 pages
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Proceedings of the 50th Hawaii International Conference on System Sciences
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Attribution-NonCommercial-NoDerivatives 4.0 International
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