Equity Portfolio Risk (Volatility) Estimation Using Market Information and Sentiment

Abstract

Multifactor models are often used as a tool to describe equity portfolio risk. Naturally, risk is dependent on the market environment and investor sentiment. Traditional factor models fail to update quickly as market conditions change. It is desirable that the risk model updates to incorporate new information as it becomes available and for this reason diBartolomeo & Warrick introduce a factor model that uses option implied volatility to improve estimates of the future covariance matrix. We extend this work to use both quantified news and implied volatility to improve risk estimates as the market sentiment and environment changes.