An

Inves(ga(on into Correla(ons between Financial Sen(ment and Prices in Financial Markets
Markets can remain irrational longer than you or I can remain solvent. J, M Keynes (aJributed)

Paul Gaskell Dr Frank McGroarty Dr Thanassis Tiropanis

Market Eciency Financial Markets are generally assumed to eciently process new informa(on that is, any nancially relevant informa(on is reected immediately in the price of assets. Typically nancially relevant informa(on is taken to mean sta(s(cal informa(on about company performance, or the wider economy. Traders are believed to ra(onally interpret this informa(on and adjust their strategies accordingly.

Markets and Online Informa6on Increasingly economists and nancial researchers have found assump(ons about ra(onality or ecient pricing fail to explain empirically observed price movements. Research has begun to turn to aJemp(ng to price soK informa(on, such as sen(ment contained in text documents, into the price of assets.

Of all the weapons in the Federal Reserve arsenal, words were the most unpredictable in their consequences. J, K Galbraith (1954), Quoted from his famous book on the wall street crash - The Great Crash, 1929
Words are Poorly Behaved Time Series Objects Although we have a wealth to text data to draw upon, language is dicult to treat mathema(cally. Sta(s(cal procedures for correla(ng (me series together rely on several assump(ons about the behaviour of each (me series, all of which tend to be violated by the nature of language.

How it is we have so much information, but know so little? Noam Chomsky

Time is a Poorly Behaved Time Series Object Time means dierent things in the context of dierent systems, stock markets have closing (mes and weekly structures that may dier from online systems we wish to draw text data from. Even if we could perform good sta(s(cs with language, how would we view (me in the context of informa(on and prices?

"The only reason for time is so that everything doesn't happen at once. Albert Einstein
Alterna6ve Sta6s6cal Models of Language We begin by looking at alterna(ve ways of dealing with language sta(s(cally. Looking at the rela(onships between dierent sets of words these rela(onships can be viewed as set-subset rela(onships as shown in the gure 1, or as network rela(onships between words as shown in gure 2.

Fig 1

Fig 2

Alterna6ve Sta6s6cal Models of Time We also consider how best to t the two series together, taking into account the poten(al eects of weekly structure (g 4) and also poten(al dierences in correla(ons using dierent (me scales. (g 3)

Fig 3

Fig 4

So can you Predict the Market with Online Informa6on? Well yes, sort of Our results to date show there are reasonably strong contemporaneous correla(ons between online sen(ment and the price of the S&P 500. In terms of predic(on we have ini(al evidence that traders appear to perceive pre-weekend news as more risky than news during the week. As a result pre-weekend nega(ve sen(ment is magnied, causing a post weekend bounce as prices recover. Correla(ons are reasonably modest though, we can predict about 20-27% of the variance in prices at present.

Financial Search Terms

Total Words in the System

Financial Sen(ment

All sen(ment bearing words

Blue = Informa(on Return Horizon Red = Price Return Horizon

t = 1

t = friday

t = friday

t = friday

t = n