STTM: an efficient approach to estimating news impact on stock movement direction

Abstract

Open text data, such as financial news, are thought to be able to affect or to describe stock market behavior, however, there are no widely accepted algorithms for extracting the relationship between stock quotes time series and fast-growing textual representation of economic information. The field remains challenging and understudied. In particular, topic modeling as a powerful tool for interpretable dimensionality reduction has been hardly ever used for such tasks. We present a topic modeling framework for assessing the relationship between financial news stream and stock prices in order to maximize trader’s gain. To do so, we use a dataset of economic news sections of three Russian national media sources (Kommersant, Vedomosti, and RIA Novosti) containing 197,678 economic articles. They are used to predict 39 time series of the most liquid Russian stocks collected over eight years, from 2013 to 2021. Our approach shows the ability to detect significant return-predictive signals and outperforms 26 existing models in terms of Sharpe ratio and annual return of simple long strategy. In particular, it shows a significant Granger causal relationship for more than 70% of portfolio stocks. Furthermore, the approach produces highly interpretable results, requires no domain-specific dictionaries, and, unlike most existing industrial solutions, can be calibrated for individual time series. This makes it directly usable for trading strategies and analytical tasks. Finally, since topic modeling shows its efficiency for most European languages, our approach is expected to be transferrable to European stock markets as well.