CXO Advisory Group points us towards new research which tests whether automated parsing of financial news to determine positive or negative sentiments can predict the short-term movement of a company’s stock. A model strategy they built based on their results returned 21.1% annualized before transaction costs, but was no longer profitable after accounting for reasonable transaction costs.

Does exceptionally negative news coverage predict hard times for a company and its stock price? In their August 2006 paper entitled “More Than Words: Quantifying Language to Measure Firms’ Fundamentals”, Paul Tetlock, Maytal Saar-Tsechansky and Sofus Mackassy test whether they can predict a company’s future performance and stock returns by quantifying the sentiment in its financial news coverage. Their sentiment measure is a standardized level of negativity based on word counts and the Harvard psychosocial dictionary. Using Wall Street Journal (WSJ) and Dow Jones News Service (DJNS) stories about individual S&P 500 firms during 1980-2004 (350,000 significant articles), along with contemporaneous financial and stock price data.

Read more: Financial News Sentiment Predicts Stock Returns?