Reuters Sentiment and Stock Returns

Abstract:     
Sentiment from over 3.6 million Reuters news articles is tested in a vector autoregression model framework on its ability to forecast returns of the Dow Jones Industrials stock index. We show that Reuters sentiment can explain and predict changes in stock returns better than macroeconomic factors. We further find that negative Reuters sentiment has more predictive power than positive Reuters sentiment. Trading strategies with Reuters sentiment achieve significant outperformance with high success rates as well as high Sharpe ratios.

Keywords: Reuters sentiment, stock returns, out-of-sample forecasts, vector error correction model

JEL Classification: G11, G14, G17

Accepted Paper Series