Volatile conditions in financial markets require that risk assessments be updated in as timely a fashion as possible.  To the extent that security price movements are the result of investors responding to new information, the fastest possible way to update risk assessments is to respond to the news flows themselves, rather than waiting to observe variations returns over time.  In diBartolomeo, Mitra and Mitra (Quantitative Finance, 2009) we present a methodology for immediately updating factor risk models directly from the number, length and content of news articles on market conditions and specific firms.  The content of text articles is summarized in “sentiment” score based on a lexicon of more than two thousand words and phrases.   We also provide empirical examples based on stocks in both the US and Europe that the inclusion of “news” into risk assessments improves risk assessment above and beyond the incorporation of implied volatility measures.

 

Mr. diBartolomeo is President and founder of Northfield Information Services, Inc. Based in Boston since 1986, Northfield develops quantitative models of financial markets. Additional Northfield staff members are located in London, Tokyo and Chicago. The firm’s clients include nearly three hundred financial institutions in twenty countries.

 
Dan is a Visiting Professor at the CARISMA research center of Brunel University in London. In addition, he serves on the Board of Directors of the Chicago Quantitative Alliance and the advisory board of the International Association of Financial Engineers. is an active member “QWAFAFEW”. Mr. diBartolomeo formerly served on the industry liaison committee of the Department of Statistics and Actuarial Sciences at New Jersey Institute of Technology. He also continues his several years of service as a judge in the Moscowitz Prize competition, given for excellence in academic research on socially responsible investing by the University of California, Berkeley.

Mr. diBartolomeo has written extensively for the CFA Research Foundation. This work includes “The Risk of Equity Securities and Portfolios” published in Equity Specialization Program Readings 1997 and a new wealth management textbook Investment Management for Private, Taxable Wealth (with Jarrod Wilcox and Jeffrey Horvitz). He also provided a chapter on asset allocation for high-net worth individuals for CFA’s recent book, Global Perspectives on Investment Management. Other writings include chapters in five other textbooks (The Handbook of Municipal Bonds; Advances in Portfolio Construction and Implementation; Linear Factor Models in Finance; Portfolio Analysis: Advanced topics in performance measurement, risk and attribution; Forecasting Volatility). His journal publications include "Socially Screened Portfolios: An Attribution of Relative Performance" (with Lloyd Kurtz) that appeared in the Fall 1996 Journal of Investing; “Investment Performance Measurement and the Probability Distribution of Pension, Assets, Liabilities and Surplus” that appeared in the Spring 1997 Journal of Performance Measurement; and two papers in Financial Analysts Journal, “Approximating the Confidence Interval on Sharpe Style Weights” (with Angelo Lobosco, July 1997) and “Mutual Fund Misclassification” (with Erik Witkowski, September 1997). His most recent publications are “Just Because We Can Doesn’t Mean We Should: Use of Daily Data in Performance Attribution” published in the Spring, 2003 Journal of Performance Measurement, and the “DSI Catholic Values 400” (with Lloyd Kurtz in Journal of Investing 2005) and “Measuring Investment Skill using the Effective Information Coefficient” in the Fall 2008, Journal of Performance Measurement.