News Beta : Factoring Sentiment Risk into Quant Models

The stock market is affected by sentiment. The question is, however, how to quantify this effect on asset prices. By utilizing the unique RavenPack Sentiment Index, a news-based proxy for market sentiment, this paper intends to address this issue empirically by exploring the pricing implications of a stock's exposure to market sentiment. We also explore a concept we coined as "news beta" or the sensitivity of stock returns to changes in market sentiment as reported by the media. After controlling for traditional factors, news beta is found to have strong return predictability over 6 and 12 month horizons. The evidence from this research suggests that market sentiment data is still an untapped source of alpha in financial markets