Uncovering Disruptive Forces to Stocks using NLP

Highlighting the power of natural language processing

September 2021. Reading Time: 10 Minutes. Authors: Wachi Bandara, PhD, and, Rodolfo Martell, PhD

This research note is a guest post from Wachi Bandara, PhD, Chief Investment Officer, and, Rodolfo Martell, PhD, Head of Portfolio Strategy, of Pluribus Labs LLC, a San Francisco-based systematic active equity manager.


  • Traditional equity factors are not useful for identifying disruption in public equities
  • Natural language processing (NLP) can be applied to uncovering the forces of disruption
  • Especially when applied to unstructured data from private markets


Every investor has wished at some point, whether they admit to it or not, to have access to a crystal ball that could foresee the future. For all Tolkien fans out there, a palantír. For all Marvel fans, the Eye of Agamotto.

FactorResearch normally publishes work on factors (duh!) because we can for the most part agree on their importance as drivers of excess returns, in large part due to the growing body of published, unpublished, and self-published work in this field of finance. Factors have been used to explain the past, and through somewhat heroic assumptions, to extrapolate into the future (try Finominal’s Alpha Analyzer for a factor exposure analysis).

The problem is, of course, the latter use assumes the future will look like the past (which invites decades-old debates about how efficient markets are). This creates a catch-22 conundrum: either we assume that factors are good to forecast the future (which implies a strong intellectual hubris or we assume factors are not well equipped to help forecast the future (in which case we accept that making future investment decisions based on factors is not a good idea).

So, if traditional factors are not efficient nor useful to understand the forces that are driving disruption in public equities, what can we do?

Let’s break this problem in smaller parts. The first step towards uncovering the forces shaping change (disruptive or continuous) in public equities is to measure innovation.


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