When Sentiment Is News: The Polarity Pattern Approach

72 Pages Posted: 30 Nov 2020

See all articles by Nazanin Babolmorad

Nazanin Babolmorad

Melbourne Business School, University of Melbourne

Nadia Massoud

Melbourne Business School, University of Melbourne

Date Written: October 5, 2020

Abstract

We present a new approach and set of dictionaries for the analysis of sentiments in financial and business news headlines at the firm level. The proposed Polarity Pattern Approach (PPA) captures the deep structure of context and syntax and reduces measurement errors evident in previous approaches for classifying the tone of words and sentences in news headlines. We demonstrate the superior predictive validity of PPA using an out-of-sample dataset. As expected, negative news headlines are negatively related to stock returns and positively related to trading volumes, while positive news headlines are positively related to both, especially for finance news. Prior studies report a non-significant or, counter intuitively, negative relationship between positive news and stock returns, which we attribute to measurement error in previous approaches. Additionally, using market activities, we jointly estimate cross-sectional regression to compare the explanatory power of the PPA approach with commonly used methods. We show how PPA’s tone assignment significantly outperforms other dictionaries and approaches, including the commercial package (RavenPack) that uses both machine learning and deep learning. The PPA, including dictionaries, provides finance researchers with a new, more valid method of sentiment analysis for media news.

Link to PPA tone assignment dataset: https://www.whensentimentisnews.com

Keywords: Financial news headlines, sentiment analysis, textual analysis, bag of words, machine learning, deep learning, topic analyses, semantic and syntactic structure, stock market returns and volume.

JEL Classification: G1, G12, G4, G41

Suggested Citation

Babolmorad, Nazanin and Massoud, Nadia, When Sentiment Is News: The Polarity Pattern Approach (October 5, 2020). Available at SSRN: https://ssrn.com/abstract=3706522 or http://dx.doi.org/10.2139/ssrn.3706522

Nazanin Babolmorad

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Nadia Massoud (Contact Author)

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia
+61 3 9349 8130 (Phone)
+61 3 9349 8136 (Fax)

HOME PAGE: http://mbs.edu/facultyresearch/facultydirectory/Pages/NadiaMassoud.aspx

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