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News Sentiment in the Gold Futures Market. 2013.

by on October 7, 2013

This paper analyses the effect of news on the gold futures market. Text analysis is used to assess whether news items relating to gold are positive, negative or neutral. This information is then weighted based on the probability that it will be understood in that way by investors, the prominence of the mention in the article and how “new” the information is.

A strong relationship is shown to exist between all news and returns, with results suggesting no change in the gold price in the absence of news. Evidence of initial overreaction to news is also found. When news is broken in good and bad to assess whether the market’s reaction is symmetric, negative news is found to have twice the effect of positive news.

The paper also finds that news during recessions is assimilated differently. Negative news looses its significance while positive news has a highly significant impact.

Increased trading volumes on the futures exchange are found to increase the impact of news on returns and in the sample as a whole continues to show a more powerful reaction to negative news, while positive news becomes insignificant. Interestingly as speculators increase their long positions the reaction to negative news becomes even more marked.

Finally some evidence is shown in favor of the idea that speculative positioning has the ability to predict future news and returns.

Method: OLS regressions

Data: Thomson Reuters News Analytics for sentiment data. COMEX futures data at a tick frequency. CFTC COT’s for speculator and hedger positioning at a weekly frequency. 2/1/2003 – 31/08/2012.

Full Citation:Smales, Lee A. “News sentiment in the gold futures market.” Journal of Banking & Finance 49 (2014): 275-286.

Abstract:  This article utilises commodity   specific news sentiment data provided by Thomson Reuters News Analytics to   examine the relationship between news sentiment and returns in the gold   futures market over the period 2003-2012. There is an asymmetric response to   news releases with negative news sentiment invoking a greater contemporaneous   response in returns of gold futures than positive news. The business cycle   influences the news / return relationship with news sentiment having a   greater impact during the recession of 2007-2009; the asymmetry effect is   reversed during this period with the less frequent positive news having a   greater impact on returns than negative news. Consistent with models of   inventory control and hedging pressure, there is evidence to support the   supposition that market positioning significantly impacts the identified   sentiment relationship with effect greatest when traders are holding   inventory contrary to their natural position; this may be partly explained by   the relative ability of traders in forecasting news events.
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