Does Social Media Sentiment Matter in the Pricing of U.S. Stocks?

15.March 2021

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.

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Quantpedia in February 2021

4.March 2021

The most significant event on our page in February was the introduction of our new Quantpedia Pro platform. We have received positive feedback so far to it; therefore, feel free to revisit our short article describing the main features of this new service and its design and reporting capabilities.

But naturally, we have not forgotten to do our homework for our other services. So, let us recapitulate last month of Quantpedia’s research. Ten new Quantpedia Premium strategies have been added to our database, and ten new related research papers have been included in existing Premium strategies during the last month.

Additionally, we have produced 12 new backtests written in QuantConnect code. Our database currently contains over 410 strategies with out-of-sample backtests/codes.

Also, three new blog posts, that you may find interesting, have been published on our Quantpedia blog:

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A Robust Approach to Multi-Factor Regression Analysis

24.February 2021

Practitioners widely use asset pricing models such as CAPM or Fama French models to identify relationships between their portfolios and common factors. Moreover, each asset class has some widely-recognized asset pricing model, from equities through commodities to even cryptocurrencies. 

However, which model can we use if our portfolio is complex and consists of many asset classes? Which factors should we include and which should we omit? (Especially if we have a database that consists of several hundreds of potential factors). Additionally, we know that equities influence bonds, commodities influence equities and vice versa. Hence the question, what about the cross-asset relationships? 

These are the problems and questions we faced when looking for a methodology for our Multi-Factor Analysis report in the Quantpedia Pro platform. This blog post aims to introduce the model, its logic and the method we have decided to use. 

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Accelerate Design of Multi-Factor Multi-Asset Models with Quantpedia Pro

23.February 2021

We hinted in the past few blogs that we were preparing a small surprise. And now it’s time to unveil what we have been cooking during the previous several months.

Let us introduce Quantpedia Pro.

Quantpedia Pro is a new analytical platform built on top of our out-of-sample backtests of selected Quantpedia Premium strategies. It allows users to significantly speed up the process of building custom model multi-factor and multi-strategy portfolios. Instead of re-creating all ideas for systematic strategies in-house, users can explore ideas and do preliminary portfolio testing on Quantpedia Pro platform.

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Fake Trading on Crypto Exchanges

11.February 2021

At Quantpedia, we acknowledge that cryptocurrencies offer numerous trading opportunities and include them in the Screener. Yet, each participant should be cautious. Cryptocurrencies are not black or white; they have their pros but also cons. Perhaps now, with all the positive sentiment around cryptos, it is the right time to advert also the cons. It is not that long time ago when we published a blog about the Bitcoin´s price manipulation, where the anecdotal evidence was supported by the Benford´s law which is related to the distribution of leading digits. 

The novel research of Amiram et al. (2020) expands the previous work about the manipulation of the BTC. The authors include a tremendous amount of currencies, study various exchanges, and most importantly, they use more methods to examine the manipulations. To be more precise, the authors utilize the Benford´s law, deviations from the log-normal distribution and the novel machine-learning algorithm E-Divisive with medians that identifies structural breaks in time series. Moreover, they aggregate the measures by computing their principal components. While the results are as always best shown by the included figures, there are numerous practical suggestions. The fake trading benefits exchanges in the short term; however, it is harmful in the long term. Lastly, exchanges with the highest popularity, some regulations and the oldest ones tend to have the lowest fake trading levels. 

 

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