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Introducing News Sentiment: A Systematic Equity Strategy Factor

In this white paper, we introduce News Sentiment, one of the Systematic Equity Strategy (SES) factors modeled by MSCI Equity Analytics Research. The News Sentiment factor seeks to identify market inefficiencies during the lag between reports about an event on newswires and social media and actions taken by investors in response to them.  Our factor helps clients measure this inefficiency by combining two descriptors: an events-driven sentiment score and a composite sentiment score, expressed as a ratio of the positive reported events divided by the total number of reported events for the period.  During the study period from January 1995 to May 2016, our research finds that strategies with the largest negative exposure to the News Sentiment factor had the largest drawdowns, while strategies with positive exposure to this factor generated positive returns with low volatility.