A News-based Machine Learning Model for Adaptive Asset Pricing

06/13/2021

∙

by   Liao Zhu, et al.

∙

0

∙

share

The paper proposes a new asset pricing model – the News Embedding UMAP Selection (NEUS) model, to explain and predict the stock returns based on the financial news. Using a combination of various machine learning algorithms, we first derive a company embedding vector for each basis asset from the financial news. Then we obtain a collection of the basis assets based on their company embedding. After that for each stock, we select the basis assets to explain and predict the stock return with high-dimensional statistical methods. The new model is shown to have a significantly better fitting and prediction power than the Fama-French 5-factor model.