Trading using market sentiment indicators is an approach that analyzes the market sentiment data to make trading and investing decisions. Due to the increasing popularity of social networks, social media data in general and Twitter data in particular have been used growingly in the construction of sentiment indicators.
Sentiment analysis can use natural language processing, artificial intelligence, text analysis and computational linguistics to identify the attitude of a writer with respect to a topic. It’s an important cornerstone of behavioral finance, where theorists believe that markets are irrational and that asset prices are driven by human emotion (e.g., fear, greed, hope and overconfidence, among others). With the growth in global conversation on social media - Twitter in particular - where a vast amount of real-time market conversation occurs on a daily basis, academics and practitioners have been studying and measuring the global conversation to understand if it can meaningfully impact markets. Most concur that Twitter sentiment is correlated to asset price moves, but the debate has been about the predictive nature of Tweets on price. Well, the results are in and the early movers in this space are seeing success. Read more
A recent paper  analyzes president Trump's Twitter data and how it impacts the financial markets. Their findings are as follow,
We start our analysis by evaluation of the impact of Mr. Trump’s tweets in general, irrespective of the actual content of the tweet. We find that the US stock market tends to decline the first 30 minutes following his publishing of a tweet and that trading volume and volatility are significantly higher after Trump has tweeted.
Next, we classify tweets depending on whether they contain a specific word. We find that tweets containing the words “products” and “tariff” have a negative impact on the stock market, i.e. these tweets are followed by decline in the market, increased trading volume and increased uncertainty (level of VIX futures).
Finally, we use Latent Dirichlet Allocation as a topic extraction technique, which assigns each tweet a degree of affiliation to a set of topics without any human input or interpretation. We analyze the short-term impact of each topic on financial markets. We find that tweets affiliated with the topics “Trade war” and “Border Security” are followed by negative returns on the S&P 500 index, increased volatility and increased trading volume. Furthermore, we find a significant decrease in the Hang Seng index, and a significant increase in the gold price after these tweets were published. This is consistent with previous results, as tweets which imply possible restrictions in international trade are often negative news for affected countries, whereas gold is safe haven and often appreciates in uncertain periods.
Based on their findings, the authors developed a simple trading strategy and it was shown to outperform Buy and Hold.
 P. Gjerstad, P.F. Meyn, P. Molnár, and T.D. Næss, Do President Trump’s tweets affect financial markets?, Decision Support Systems, April 2021, 113577
Article Source Here: Trading Using Twitter Data, a Strategy Based on President Trump’s Twits
What is Value at Risk?
Value at Risk (VaR) refers to a financial metric used in finance that investors use to estimate the risk of their investments. It involves measuring and quantifying the level of financial risk within investors’ portfolios for a specific period. However, it doesn’t only apply to portfolios. Businesses and companies may also use value at risk to estimate the level of risk within their businesses.
Through VaR, investors can measure the amount of potential loss that they could make in any investment portfolio for a specific time. Investors can also use it to estimate the probability of losing more than a specified amount in any given portfolio. In short, VaR is a measure of the risk of loss that investors face for any given investment.
What is the Value at Risk formula?
There are various methods that investors can use to calculate the VaR for any given investment for a specific time. These include the historical and variance-covariance methods. Investors can also calculate the VaR for an investment using Monte Carlo simulations. Using the historical method, investors can use the following value at risk formula.
Value at Risk = Vm (Vi / Vi - 1)
In the above formula, ‘Vi' represents the number of variables on a day, 'i’. ‘m’ denotes the number of days from which historical data is taken. Under the variance-covariance method, the value at risk formula is as below.
Value at Risk = [Expected Weighted Return of The Portfolio) - (Z-Score of The Confidence Interval X Standard Deviation of Portfolio)] X Portfolio Value
What are the benefits of using Value at Risk?
Using value at risk has several advantages. Firstly, it is also easy to understand as it represents the degree of risk for any investment. Unlike other concepts, VaR provides a quantifiable measure of risk. Due to its ease of use, most investors use it as an accepted standard when investing. It further adds to its understandability.
Value at risk is also a concept that applies to almost every investment, such as stocks, bonds, commodities, etc. Therefore, it is a reliable tool for investors to assess the profitability of risk for different investments. On top of that, it allows for easier comparability of risks for various asset classes.
What is the limitation of Value at Risk?
Value at risk has some limitations which may hinder its use. Firstly, VaR makes some assumptions, which may not apply every time. For example, it assumes there is no trading in the portfolio. On top of that, there are three different methods that investors can use to calculate VaR. Each of these methods makes several assumptions and can provide varying results.
Lastly, VaR is historically well-known not to provide accurate results for large portfolios. It is because large portfolios have various assets. For each asset, investors have to calculate several figures, which may not be possible. Furthermore, the more of these calculations investors have to make, the less accurate the result obtained will be.
Value at risk is a financial metric that investors can use to estimate the risk of their investments for a specific period. Using VaR, investors can quantify the level of risk within their portfolios. There are three methods that investors can use to calculate the figure. Using VaR has several benefits. However, it also comes with some limitations.
Article Source Here: Value at Risk Formula
Investors with varying risk tolerances will select different investing strategies. Some of these strategies promise higher returns. However, these also come with higher risks. On the other hand, some strategies may come with low risks and rewards. Similarly, investors may also choose strategies based on the time it takes for them to materialize their returns. Two such strategies, often the opposite of each other, are market timing and buy and hold.
Both market timing and buy and hold investing strategies offer returns at varying rates. Therefore, these strategies differ from each other. Before understanding their differences, it is crucial to understand what each of these is.
What is Market Timing?
Market timing is an investment strategy that investors use to invest in a financial market using predictions. Using this strategy, investors perform several types of analysis to analyze trends. Using those trends, they identify stocks and securities that will experience a price increase or decrease in the future. Once they do so, they can invest in the stock or security and profit in the future.
Market timing is a short-term strategy that investors use to maximize their returns. Once investors identify potential investments, they can either take a long or short position in the market. Usually, investors wait for the investment to reach the predicted position and buy or sell it accordingly. This way, they can profit from short-term price fluctuations.
What is Buy and Hold?
Buy and hold is another strategy that investors use when investing in financial markets. However, this strategy is relatively long-term. The buy and hold strategy requires investors to identify stocks that will provide returns after a long period. This strategy does not depend on short-term market price fluctuations. Instead, it ignores any short-term movements and requires investors to wait a long time before taking action.
With the buy and hold investing strategy, investors don't have to identify patterns and trends actively. Instead, it is a passive strategy that investors can use to benefit in the long term. The buy and hold strategy is relatively low risk compared to the market timing strategy. However, it has the potential to provide significantly high returns.
What are the differences between Market Timing and Buy and Hold strategies?
The differences between both strategies are clear from the above explanation of each of these. The first difference between the two strategies is the timeframe. Usually, market timing is short-term, while the buy and hold strategy is long-term. On top of that, the market timing strategy requires active management and participation from the investor. The buy and hold strategy, in contrast, does not.
Both investing strategies include risks. However, the risks associated with the marketing timing strategy are significantly higher due to its dependence on market price fluctuations. In contrast, the buy and hold strategy includes lower risks. While both of these strategies can also provide high returns, the market timing strategy can return significantly more profits.
Usually, the market timing strategy provides more returns because investors can earn higher in a shorter time. The buy and hold strategy can also deliver high returns. However, it takes longer for these returns to materialize. Lastly, both investing strategies have some advantages and disadvantages. However, most experts prefer the buy-and-hold strategy over the market timing.
Investors use various investment strategies to maximize their returns in the market. For some investors, the timing of these returns might also be crucial. The market timing strategy provides returns in a short time. However, it requires active management. On the other hand, the buy and hold strategy is a passive strategy. However, it takes longer for returns to materialize from this strategy.
Article Source Here: Market Timing vs Buy and Hold
Every investor in the market has an investing strategy that helps them maximize their returns. These strategies are usually flexible and differ according to the investor's risk tolerance, financial situation, budget, etc. Investors can either use a single strategy or a combination of various strategies to achieve their goals. One of the investing strategies commonly used by investors is market timing.
What is Market Timing?
Market timing is an investment strategy through which investors make investments in asset classes based on predictive methods. With this strategy, investors have to make assumptions about what a security price will be at a future time. Investors can either speculate on the prices rising or falling in the future.
Market timing represents the predictions made by investors about security price movements. Using market timing, investors can speculate on when a stock or security's price will move. This way, they can invest according to their speculation to profit later if it turns out to be true. The aim of this strategy is to outperform the market by taking a long or short position.
How does Market Timing work?
The market timing strategy starts from a prediction that investors make. Investors can select a stock and predict whether its price will increase or decline in the future. There are several tools that investors may use to reach a conclusion about the prediction. Once an investor makes a prediction, they can invest in the selected stock and security.
There are two investment positions that investors can take in a market timing strategy. It may include a long position, where an investor buys the security or stock. This approach works when the investor believes the price of the selected instrument will increase in the future. Instead, investors may also take a short position to sell the stock or security. This approach works when the investor predicts the price to fall in the future.
What are the advantages and disadvantages of the Market Timing strategy?
The most prominent advantage of using the market timing strategy is the return investors get. Investors can earn significantly more with this strategy, given that they can make the correct predictions. This strategy also allows investors to make profits at a quicker rate compared to other strategies. The market timing strategy is riskier. However, the higher returns that investors get can offset the risks undertaken.
However, the market timing strategy requires more effort from investors. Investors need to track market behaviour and trends continuously to identify future positions. Similarly, due to the higher risks, this strategy can expose investors to high losses. Furthermore, investors have to pay higher taxes due to the short-term nature of these investments.
When should investors use the Market Timing strategy?
The market timing strategy isn't for everyone. This strategy is only beneficial for experienced investors that can identify market trends and patterns and make predictions accordingly. For novice investors, the market timing strategy is attractive due to the high rewards it promises. However, it also has the potential to cause significant losses.
Market timing is a strategy that investors use to make predictions on future stock or security prices. Using these predictions, investors can either buy or sell the selected stock or security in the market. The market timing strategy can be highly profitable if used correctly. However, it can also result in substantial losses. This strategy is best if used by experienced investors.
Post Source Here: What is Market Timing?
We typically divide the markets into 2 regimes: trending or mean-reverting. In a recent paper , the authors not only divided the markets into these 2 regimes but also added a third one, a so-called random walk regime.
Investors generally go long when the market is rising and short when the market is falling. In order to implement trading strategies more effectively, it is very important to mine the market direction and the timing of long and short positions. This article divides the direction of the market into three categories: Random Walk (RW), Trend Following (TF) caused by negative reflection, and Mean Reverting (MR) caused by overreaction.
Usually, we utilize the Autocorrelation function or Hurst exponent in order to characterize the markets. There exist, however, other methods that can be used for this purpose, such as
These methods were utilized in the above-mentioned article.
Push-Response Test, Variance Ratio Test, and P+, P- Test are used to determine the direction of the market, and finally formulate specific trading strategies according to the market type to achieve profitability. This article summarizes the market of certain indexes of US futures, such as HO, GC, etc., which have TF trends in recent years. Taking the ES (E-mini S&P 500) contract as an example, the results show that ES has a trend of TF in the last 6 years, and a trend of MR in 97-09. This article proposes quantitative strategies based on TF and MR market respectively, and applies it to the ES index to verify the effectiveness of the trading strategies.
After analyzing the market characteristics, the authors developed two low-frequency trading strategies, one is a trend-following (TF) strategy, and the other is a mean-reverting (MR) one. The Sharpe ratios of the TF and MR strategies are 2.8 and 0.14 respectively.
From the results, we notice that the TF strategy has a much higher risk-adjusted return than the MR one. It is a surprise to us. This is probably due to the fact that the authors developed trading strategies that include commodities, and not just stock market indices.
 C. Zheng, G. Gan, J. Zhao, H. Li, Mining Market Directions: A Type of Trading Strategy for Trend Following and Mean Reverting Index, 2021 International Conference on Electronic Commerce, Engineering Management and Information Systems.
Originally Published Here: Using Push-Response, Variance-Ratio, and P+/P- Tests to Characterize the Markets.
What are commodities?
Commodities represent basic goods available in the market. These goods are interchangeable with other goods of the same type. Similarly, investors can also buy and sell them on dedicated markets. Some examples of commodities include precious metals, food items, oil, natural gases, etc. Usually, these goods come from producers, who are responsible for providing the market.
However, commodities are volatile investments compared to other assets. It is usually because these assets experience continuous price fluctuations. Investors can include any specific commodity in their portfolio by acquiring it from the market. However, they also have the option to invest in a commodity index.
What is a Commodity Index?
The term commodity index refers to an investment vehicle that tracks the prices and returns on commodity investments. These investments usually consist of a basket of commodities. When investors want to include commodities in their investment portfolio, they can invest in these indexes. These investments are available on various exchanges.
Using commodity indexes, investors can access the commodities market. Like other indexes, these commodity indexes use the underlying commodities to derive a value. Therefore, any fluctuations in the underlying commodities' prices can also impact the index's overall price. Investors can trade this value on an exchange.
There are many types of commodity price indexes from which investors can choose. The difference comes in the way each index is weighted. One of the types of commodity indexes is the commodity price index.
What is a Commodity Price Index?
A commodity price index is a type of fixed-weighted commodity index. Sometimes, a commodity price index may also be a weighted average of underlying commodity prices. The index value for commodity price indexes comes from a spot or future price. Commodity price indexes are representative of a wide range of commodities. Some indexes may also include a specific type of commodity.
Commodity price indexes track a basket of commodities that measure their prices. Any fluctuations in the price of the underlying commodities can cause movements in the index price as well. Investors can access these indexes on exchanges. Therefore, investors can enter the commodities market without having to enter the futures market.
How do Commodity Indexes work?
Different commodity indexes track the market price of a specific or broad range of commodities. Each index has a different structure based on which commodities it includes. On top of that, the weighting process of each index may differ. For example, an index weighted based on an underlying commodity is known as a commodity price index.
Commodity indexes have been a popular choice among investors for over a decade. Its popularity comes from the fact that commodity indexes allow investors to invest in commodities without active management. Similarly, investors don't need to track each commodity's price by themselves. Instead, they can invest in a commodity index to bring all of these under one roof.
Commodities are basic goods available in the market which are interchangeable with goods of the same type. A commodity index represents an investment vehicle that tracks the prices and returns on commodities. A commodity price index derives its value from the prices of underlying commodities. This value for this index comes from a spot or future price.
Article Source Here: What is Commodity Price Index
Financial derivatives are instruments that derive their value from an underlying asset or group of assets. These derivatives are a crucial part of the market. Most investors use financial derivatives to mitigate any risk they face with their investments. There are many types of these derivatives that investors can use to hedge against any future losses. One of these includes swaps.
What are Swaps?
A swap is a type of financial derivative contract that allows two parties to exchange the cash flows from their financial instruments. These usually include agreements where one party compensates the other for the difference between the cash flows from the underlying financial instrument. In swaps, the principal amount of financial instruments do not change hands. Instead, these contracts only include the exchange of cash flows.
Since there are two parties involved in a swap contract, one party will almost always suffer from a loss. While swaps mitigate some risks associated with investments, these contracts also introduce other risks. For example, they include counterparty risk for both parties. There are many types of swap contracts that investors can use for their financial instruments. For commodities, investors can use commodity swaps.
What is a Commodity Swap?
A commodity swap is a type of swap contract that derives its value from an underlying commodity or group of commodities. In these contracts, two parties agree to exchange the cash flows from an underlying commodity's price changes. Commodity swaps represent customized deals that allow two investors to mitigate against losses for their respective commodity investments.
Commodity swaps are contracts prevalently used by commodity producers and customers to lock a set price for a specified commodity. Unlike other types of financial derivatives, commodity swaps are not available on financial markets or exchanges. Instead, producers can enter into these contracts with their customers or financial services companies.
How do Commodity Swaps work?
Commodity swaps are contracts between two parties. Usually, these swaps include a fixed-leg and a floating-leg component. The fixed-leg element is the price set in the swap contract. The floating-leg component relates to the market price of the underlying commodity or agreed-upon commodity index. Usually, commodity swaps are prevalent for oil or precious metal investors.
With commodity swaps, the commodity consumer gets a fixed price for a specific period of time. The commodity swap also provides the provider with protection against a decline in the commodity's price over the specified time. At the end of the contract, one party compensates the other through cash or physical delivery.
Why are Commodity Swaps important?
Commodity swaps are critical for several reasons. Most commonly, these contracts allow parties to protect against any losses associated with commodity price fluctuations. In turn, it enables them to reduce their risks related to commodity price volatility. The other party will also receive a guarantee of a stable selling price for their commodity.
Commodity swaps can also be beneficial for investors looking for more exposure to the underlying commodity. Usually, these contracts are cash-settled. Therefore, there is no physical of the underlying commodity involved.
Swaps are contracts that allow investors to exchange the cash flows associated with an underlying asset or group of assets. Commodity swaps are a type of swap contract. These allow one party to transfer the cash flows from the price fluctuations of an underlying commodity. These swaps are crucial for mitigating risks and getting a fixed price in the future.
Article Source Here: What is a Commodity Swap?
For most investors, having a diversified investment portfolio is crucial in mitigating risks associated with a single asset class. Therefore, investors may choose to invest in different assets, such as stocks, debt instruments, real estate, etc. One of these investments includes commodities, such as precious metals, grains, food items, etc.
Like other asset classes, commodities also have dedicated markets where investors can find specific items. Similarly, these assets have similar characteristics to other investments. However, commodities may have a volatile nature compared to assets such as socks or debt instruments. Therefore, investors will need to manage the risks associated with these investments through various techniques. One of these includes commodity hedging.
What is Commodity Hedging?
Commodity hedging is a process that investors can use to mitigate associated with their commodity investments. Hedging is a technique that allows investors to get protection against any adverse movements in the market. Similarly, it involves using techniques to offset any investing losses by taking the opposite position for a relative asset.
Commodity hedging involves using hedging techniques to manage the volatility and risks of investing in several commodities. For example, it may include the use of commodity swaps or futures to limit the losses investors make. Usually, commodity hedging consists of using derivatives, such as the ones above.
How does Commodity Hedging work?
Commodity hedging works in a similar way as hedging for any other asset or class of assets. When investors suspect to make a loss at a point in the future with the commodities, they may employ hedging techniques to prevent or limit the losses. While doing so, they may also reduce the potential profits they would have made if they hadn't utilized hedging techniques.
Once investors identify the commodity at risk, they will make a trade-in with another asset. Usually, this asset is a derivate that the investor can use, such as futures, swaps, forwards, etc. Through these financial instruments, investors can offset the risk of future adverse price movements. However, this technique also has the potential to fail.
When an investor uses commodity hedging, they hedge against future market price decreases. In case the prices decline in the future, the investor will successfully hedge against the adverse effects. However, if the prices increase, the investor will lose their potential profits from fixing the commodity's price or hedging against it.
Why is Commodity Hedging important?
Commodity hedging is crucial for various reasons. Firstly, it allows investors to mitigate against any potential future losses. This way, the investor does not suffer from any adverse effects caused by price fluctuations. Successful hedging can provide investors with protection against commodity price changes. In essence, it can help investors in maximizing their returns.
In the commodity market, the use of hedging techniques is crucial. Due to the volatile nature of these investments, investors need to monitor their investment position continuously. Through hedging, investors can achieve peace of mind by locking their profits. Therefore, they don't need to monitor their portfolio constantly due to market volatility.
Commodity hedging is the use of hedging techniques by investors to protect themselves against commodity price fluctuations. Investors can use various derivatives, such as futures, forwards, or swaps, to do so. Commodity hedging is crucial for investors, especially due to the volatile nature of most commodity investments.
Article Source Here: What is Commodity Hedging?
The term commodity refers to basic, interchangeable goods used in commerce. These may include items such as precious metals, natural gases, food items, etc. Commodities play a significant role in any given economy. They are also essential in the production of goods and services in a county. Commodities are often available for exchange, which makes them an investable asset for investors.
Like any other asset investment, commodities have some risks and rewards associated with them. Similarly, these are often available on specialized markets or exchanges. Usually, investors prefer to include commodities in their investment portfolios as a part of the asset allocation strategy. Like other investments, investors can also hedge against the risks associated with commodities.
What is a Commodity Future?
A commodity future is a futures contract that investors can enter into to buy or sell a specific number of commodities in the future. This contract also allows investors to set the price for future transactions and specifies the date for it. Commodity futures are a prevalent method that investors use to hedge or protect their investment position. Sometimes, investors can also use commodity futures as a part of the speculation strategy.
Commodity futures include all characteristics of future contracts. As futures contracts, commodity futures contracts are derivatives that get their value from the underlying commodity or commodities. These contracts obligate the parties to exchange or transact an asset in the future at a specific date and price. Commodity futures are crucial to hedge against the volatility related to some commodities.
How do Commodity Futures work?
Commodity futures work like any other futures contract. However, the underlying asset in these contracts is commodities. Two parties enter into a commodity future contract that allows them to fix a price at a specified date. At that date, if the commodity price has increased, the futures contract buyer will profit. If not, the seller will benefit.
Commodity futures contracts may also differ from other contracts. These contracts usually do not include the actual transfer of a commodity to the buyer. Instead, the seller provides proof that the specific asset exists at a disclosed location. At the expiration date, the contracts are either netted or closed out. One party then settles the difference between the original and closing trade through cash.
What are the advantages and disadvantages of Commodity Futures?
Commodity futures can play a significant role in helping investors mitigate the risks associated with commodity investments. On top of that, these contracts ascertain that commodity producer benefits from a fixed sales price in the future. In cases such as when the commodity is grains or food items, the contracts can be significantly beneficial for the producer.
However, commodity futures can also harm the producer if the market prices increase by the expiration date. Therefore, trading in commodity futures can be risky due to the volatility associated with some commodities. Commodity prices may also fluctuate due to events beyond control and can, thus, cause even more harm. Usually, commodity futures are not for novice-level investors.
Commodity futures are contracts that allow two parties to fix the price for a commodity in the future. Commodity futures contracts play a significant role in allowing investors to mitigate risks associated with commodity investments. These contracts have similar characteristics to other futures contracts. Like any other type of investment, commodity futures have some benefits and drawbacks, as discussed above.
Originally Published Here: What is a Commodity Futures Contract?
What is Capitalization Rate?
Capitalization rate (or simply Cap Rate) refers to the rate of return used for real estate valuation. Cap rate is the rate of return that investors can expect to generate on a real estate investment property. This rate uses the net income generated through properties and is calculated by taking the net operating income and dividing it by the property asset value.
The capitalization rate is critical for investors for several reasons. Firstly, it allows investors to estimate the returns they will get on their investment in the market. In addition to that, the cap rate is also necessary for calculating a property's value under some valuation models. Cap rate is also helpful in comparing the relative value of several real estate investments in the market.
What is the Capitalization Rate formula?
While the capitalization rate is similar to the rate of return, the calculation is relatively straightforward. The capitalization rate formula divides the net operating income by the current market value of the property. Mathematically, it is as below.
Capitalization Rate = Net Operating Income / Asset’s Current Market Value
In the above formula, net operating income represents the annual income that the property in consideration generates. This income constitutes the total income after deducting any expenses incurred from operations. These operations may include managing the property, paying for repairs, paying taxes, etc. On the other hand, the current market value represents the value of the property in the market at the time.
An investor wants to invest in real estate. The investor has the option to invest in one of three different properties. Given below are details of each property.
All properties are within the investor's investment limit. However, all of these have varying incomes and values. Therefore, the investor must determine each property's capitalization rate to decide which one will maximize their return. Property A has the highest net operating income of $85,000 ($100,000 - $15,000). However, it only has a cap rate of 5.67%.
Property B has the lowest net operating income of $68,500 among the three options. However, it also requires minimum investment. It means that Property B will have a cap rate of 5.71%, which is higher than Property A. Lastly, Property C has a net operating income of $81,000, which is higher than Property B but lower than Property A. Despite that, it has a cap rate of 5.79%.
For the investor, investing in Property C will generate the maximum return for their given investment. The runner-up among these three properties will be Property B, with a cap rate of 5.71% despite having the lowest net operating income. Lastly, Property A will provide the lowest returns for the investor, although it generates the maximum operating income.
Capitalization rate is the rate of return investors can expect to generate on real investment properties. It takes the net operating income from a property and divides it by its current market value. The cap rate can be useful for several reasons, including making investing decisions, valuing real estate, estimating the payback period of an investment, etc.
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