Is There Alpha in News Sentiment?

Exploring News Sentiment and Stock Return Predictability

Hi there! It’s time for a new blog post. This one explores how news sentiment can predict stock returns. I hope you find it insightful and that it sparks new ideas!

Introduction

The use of news sentiment analysis to predict stock returns has gained significant traction in recent years, evolving from early dictionary-based approaches to today's large language models. Research has consistently shown that news sentiment can predict returns at multiple levels, from individual stocks to entire sectors and broader market indices. In this post, I discuss key research findings on sentiment and its predictive power, test a sentiment-based signal, discuss how to obtain sentiment data, and conclude with actionable takeaways for investors.