This week’s blog is unique compared to our previous posts. We have identified two papers that are connected, each with interesting findings and implications. One of today’s leading topics is the Robinhood trading platform, but not from the point of view of recent short squeezes and speculations. The Robinhood can be an interesting insight into retail investing and implications for the market. Research suggests that despite the very low share of retail investors, their power is significantly high. This seems to be caused by the inelastic market, which passive investing contributes to. Therefore, inelasticity is another crucial point.

Five new strategies have been added.

Six new related research papers have been included into existing strategy reviews and two short free blog posts have been published during last few weeks. Plus, six trading strategies have been backtested in QuantConnect in the previous two weeks.

Although the models cannot entirely capture the reality, they are essential in the analysis and problem solving, and the same could be said about asset pricing models. These models had a long journey from the CAPM model to the most recent Fama French five-factor model. However, the asset pricing models still rely on fundamentals, and as we see in the practice every day, the financial markets or investors are not always rational, and prices tend to deviate from their fundamental values. Past research has already suggested that the assets are driven by both the fundamentals and sentimen. The novel research of Koeppel (2021) continues in the exploration of the hypothesis mentioned above and connects the sentiment with the factors in Fama´s and French´s methodology. The most interesting result of the research is the construction of the sentiment risk factor based on the direct search-based sentiment indicators. The data are sourced by the MarketPsych that analyze information flowing on social media. For comparison, public news is not a source of such exploitable sentiment indicator.

The sentiment score extracted from social media can be exploited to augment the Fama French five factors model. Based on the results, this addition seems to be justified. Adding the sentiment to the pure fundamental model explains more variation and reduce the alphas (intercepts). Moreover, the factor is unrelated to the well-known and established risk factors utilized in the previous asset pricing models, including the momentum. Finally, the sentiment factor seems to be outperforming several other factors, even those established as the smart beta factors.

Five new strategies have been added.

Five new related research papers have been included into existing strategy reviews and two short free blog posts have been published during last few weeks. Plus, six trading strategies have been backtested in QuantConnect in the previous two weeks.

Five new strategies have been added.

Five new related research papers have been included into existing strategy reviews and two short free blog posts have been published during last few weeks. Plus, six trading strategies have been backtested in QuantConnect in the previous two weeks.