Sentiment & Factor Performance

Can Factor Returns Be Improved via Big Data?

February 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Stock sentiment can be aggregated from public sources using a big data approach
  • Results indicate that sentiment has some predictability for short-term factor performance
  • Positive sentiment resulted in higher subsequent returns than negative sentiment

INTRODUCTION

Albert Einstein famously stated that “information is not knowledge”, which is more relevant than ever as the amount of available information is increasing almost exponentially. As a private person, it is simple and instinctive to ignore most information, but many investors believe they need to be continuously updated and informed about the latest developments of markets and companies, which has become somewhat overwhelming compared to the pre-Internet period.

Fortunately, technology has evolved to facilitate information processing and is empowering investors to exploit big data and gain unique insights. Investors might acquire real-time data on the sales of a retailer via credit card transactions, observe the energy supply chain by watching the movement of oil tankers with satellite images, or analyze the stock sentiment via Twitter feeds.

Given this evolution, it should have become significantly easier to understand investment strategies, especially systematic ones like factor investing that feature a rules-based composition. However, despite all the data, there is still very little new knowledge on what is driving factor performance.

In this short research note, we will investigate how sentiment extracted from big data impacts the returns of the Momentum and Value factors in European equities (read Mapping My Mind: Value Factor).

METHODOLOGY

We focus on the Momentum and Value factors in the European stock market. Momentum stocks are selected based on their 12-month performance, excluding the last month, and Value stocks on a combination of price-to-book and price-to-earnings multiples. Only stocks with a minimum market capitalization of $1 billion are included. Portfolios are comprised of the top and bottom 10% of the universe sorted by the factors, rebalanced monthly, and each transaction incurs costs of 10 basis point