Reuters Sentiment and Stock Returns

We examine the statistical power of fundamental and behavioral factors with regards to stock returns of the Dow Jones Industrials Index. With a novel sentiment dataset from over 3.6 million Reuters news articles, we find signifcant correlations between Reuters senti- ment and stock returns. We show with vector autoregression and error correction models that sentiment can explain and predict changes in stock returns better than macroeconomic factors. Considering posi- tive and negative sections of Reuters sentiment, we find that negative sentiment performs better in simple trading strategies to predict stock returns than positive sentiment, while the sentiment effect remains over months.