This chapter features an analysis of the relationship between the volatility of the Dow Jones Industrial Average (DJIA) Index and a sentiment news series using daily data obtained from the Thomson Reuters News Analytics (TRNA) provided by The Securities Industry Research Center of the Asia Pacific. The expansion of online financial news sources, such as Internet news and social media sources, provides instantaneous access to financial news. Commercial agencies have started developing their own filtered financial news feeds, which are used by investors and traders to support their algorithmic trading strategies. In this chapter, we use a high-frequency sentiment series, developed by TRNA, to construct a series of daily sentiment scores for DJIA stock index component companies. A variety of forms of this measure, namely, basic scores, absolute values of the series, squared values of the series, and the first differences of the series, are used to estimate three standard volatility models, namely, GARCH (Generalized Autoregressive Conditional Heteroscedastic), EGARCH (Exponential Generalized Autoregressive Conditional Heteroscedasctic), and GJR (Glosten, Jagganathan and Rundle (1993)). We use these alternative daily DJIA market sentiment scores to examine the relationship between financial news sentiment scores and the volatility of the DJIA return series. We demonstrate how this calibration of machine-filtered news can improve volatility measures.

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Department of Econometrics

Allen, D., McAleer, M., & Singh, A. (2015). Machine News and Volatility: The Dow Jones Industrial Average and the TRNA Real-Time High-Frequency Sentiment Series. doi:10.1016/B978-0-12-802205-4.00019-1