Using Social Media and News Sentiment Data to Construct a Momentum Strategy

Momentum strategy is one of the most popular strategies that market participants use to make investment decisions. In the past two decades, many researchers have shown that momentum strategy beats the market, and provides attractive portfolio returns. In this study we investigate Dow Jones Industry Average (DJIA) index and include news data and social media sentiment data to improve the performance of momentum strategy. Particularly, we select StockTwits as the social media source. Four weekly momentum strategies are built and compared over a five-year back-testing period. This research starts with using market data to calculate 5-day Relative Strength Indicator (RSI) that captures the momentum of price. A momentum strategy is constructed based on the overbought/oversold (70/30) signals of RSI proposed by Wilder (1978). Furthermore, the news and social media sentiment data are applied separately to enhance the RSI selections of momentum strategy. News impact scores are used to give more precise evaluations toward news sentiment. Finally, news and social media sentiment data are applied as a double filter to enhance the momentum strategy. The results show that news sentiment and social media data improves the performance of the momentum strategy