A Machine Learning-Based Trading Strategy Using Sentiment Analysis Data
Using sentiment indicators with traditional factors enhance returns
Lucena Research uses RavenPack Equity Indicators in two strategies. First, Lucena constructs a portfolio by using the RP Indicators together with a 5-day momentum factor and, secondly, it combines them with other factors selected by Machine Learning in the Lucena QuantDesk® platform.
Lucena found that constructing portfolios using sentiment indicators jointly with traditional factors can result in significant outperformance versus the S&P 500 benchmark over their Jan 2005 to Nov 2014 backtesting period. In particular, with machine learning, Lucena finds P/E ratios and moving average crosses to work well with the sentiment indicators, delivering:
- an outperformance of 339% against the benchmark over the period
- a Sharpe Ratio of 0.83 versus 0.46
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