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Schnaubelt, Matthias
Fischer, Thomas G.
Krauss, Christopher
Year of Publication: 
Series/Report no.: 
FAU Discussion Papers in Economics No. 14/2018
Most statistical arbitrage strategies in the academic literature soley rely on price time series. By contrast, alternative data sources are of growing importance for professional investors. We contribute to bridging this gap by assessing the price-predictive value of more than nine million tweets on intraday returns of the S&P 500 constituents. For this purpose, we design a machine learning pipeline addressing specific challenges inherent to this task. At first, we engineer domain-specific features along three categories, i.e., directional indicators, relevance indicators and meta features. Next, we leverage a random forest to extract the relationship between these features and subsequent stock returns in a low signal-to-noise setting. For performance evaluation, we run a rigorous eventbased backtesting study across all tweets and stocks. We find annualized returns of 6.4 percent and a Sharpe ratio of 2.2 after transaction costs. Finally, we illuminate the machine learning black box and unveil sources of profitability: First, results are both driven and limited by the temporal clustering of tweets, i.e., the majority of profits stem from tweets clustered closely together in time, corresponding to high-event situations. Second, the importance of included features follows an economic rationale, e.g., tweets with positive sentiment tend to yield positive returns and vice versa. Third, we find that stocks of medium market capitalization and from the consumer and technology sectors contribute most to our results, which we interpret as a trade-off between tweet coverage and tweet relevance.
statistical arbitrage
machine learning
random forests
trading strategy backtesting
social media
Document Type: 
Working Paper

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