Zheng Tracy Ke
Department of Statistics
1 Oxford St.
Cambridge, MA 02140
Institutional Affiliation: Harvard University
NBER Working Papers and Publications
|August 2019||Predicting Returns With Text Data|
with Bryan T. Kelly, Dacheng Xiu: w26186
We introduce a new text-mining methodology that extracts sentiment information from news articles to predict asset returns. Unlike more common sentiment scores used for stock return prediction (e.g., those sold by commercial vendors or built with dictionary-based methods), our supervised learning framework constructs a sentiment score that is specifically adapted to the problem of return prediction. Our method proceeds in three steps: 1) isolating a list of sentiment terms via predictive screening, 2) assigning sentiment weights to these words via topic modeling, and 3) aggregating terms into an article-level sentiment score via penalized likelihood. We derive theoretical guarantees on the accuracy of estimates from our model with minimal assumptions. In our empirical analysis, we text-mi...