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Using semantic fingerprinting in finance

Dr. David StolinProfessor of Finance

Toulouse Business SchoolUniversity of Toulouse, France

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Textual analysis in financeHigher-hanging fruit: semantic (content) analysis

– Today: some cool things you can do with an easy-to-use form of semantic analysis called semantic fingerprinting (SF)

Low-hanging fruit: sentiment (tone) analysis

– First to trade on company-specific news stories

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The human cerebral cortex…effectively converts concepts into a geometrical representation…

From Mitchell et al., Science (2008)

…which is stable over time and across people.

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Cortical.io’s SF seeks to do the same

mustard, onion

nitrogen, organic

pilot, parachute

refueling, gasoline

“celery” “airplane”From http://www.cortical.io/topic-explorer.html

SF also works on texts“Dataconomy is the leading portal for news, events and expert opinion from the world of data driven technology. Founded in Berlin, a hub for data science innovation, we provide a global network of industry-renowned contributors and local communities all across Europe. We focus on industry giants and disruptive startups alike, looking at only the most interesting applications of data technology.”

database, computing

business, entrepreneurship

blog, newsroom

From http://dataconomy.com/about-us/ From http://www.cortical.io/keyword-extraction.html

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Advantages of SF• Focuses on concepts instead of specific

words– Related words are part of the same concept

• Has an intuitive topology• Works across languages• No need for pre-processing e.g. to drop

punctuation, articles, prepositions, suffixes

• Is faster than alternative methods

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So how can we apply SF in finance?

Semantic fingerprints of company descriptions

Semantic fingerprints of news stories

Two types of building blocks

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Boeing’s official business descriptionItem 1. BusinessThe Boeing Company, together with its subsidiaries (herein referred to as “Boeing,” the “Company,” “we,” “us,” “our”), is one of the world’s major aerospace firms.We are organized based on the products and services we offer. We operate in five principal segments:

Commercial Airplanes;Our Defense, Space & Security (BDS) business comprises three segments:Boeing Military Aircraft (BMA),Network & Space Systems (N&SS) andGlobal Services & Support (GS&S); andBoeing Capital (BCC).

Our Other segment includes the unallocated activities of Engineering, Operations & Technology (EO&T) and Shared Services Group (SSG), as well as intercompany guarantees provided to BCC. EO&T provides Boeing with technical and functional capabilities, including information technology, research and development, test and evaluation, technology strategy development, environmental remediation management and intellectual property management.Commercial Airplanes SegmentThe Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, principally to the commercial airline industry worldwide. We are a leading producer of commercial aircraft and offer a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and non-U.S. airlines. This family of commercial jet aircraft in production includes the 737 narrow-body model and the 747, 767, 777 and 787 wide-body models. Development continues on the 787-9 and 737 MAX derivatives. The Commercial Airplanes segment also offers aviation services support, aircraft modifications, spares, training, maintenance documents and technical advice to commercial and government customers worldwide.Defense, Space & SecurityOur BDS operations principally involve research, development, production, modification and support of the products and related systems as described below. BDS' primary customer is the United States Department of Defense (U.S. DoD) with approximately 70% of BDS 2012 revenues being derived from this customer (excluding foreign military sales through the U.S. government). Other significant revenues were derived from the National Aeronautics and Space Administration (NASA), international defense markets, civil markets and commercial satellite markets. BDS consists of three capabilities-driven businesses: BMA, N&SS and GS&S. Additionally, the Phantom Works group is an integrated team that works with the three businesses via product development, rapid prototyping and customer engagement through experimentation and enterprise technology investment strategies.Boeing Military Aircraft SegmentThis segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems for global strike, including fighter and combat rotorcraft aircraft and missile systems; global mobility, including transport, tanker, rotorcraft and tilt-rotor aircraft; and airborne surveillance and reconnaissance, including command and control, battle…

(goes on for 5 more pages)

SFs of well-known companies

JP Morgan

Bank of AmericaUnited Technologies

Boeing Merck

Pfizer

Microsoft

Intel

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Using company SFs to predict stock return correlations

• Why? Portfolio optimization, risk management• How? Use SF similarity for pairs of stocks• Predicts correlations better than

computationally intensive word-list (Hoberg-Phillips) approach

• Adds predictive power even to advanced models

• Details and code in Ibriyamova, Kogan, Salganik-Shoshan and Stolin (2016), http://ssrn.com/abstract=2755585

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Using news SFsto predict stock trading

• A lot of interest in the market impact of news– For company-specific news stories

• But few companies are regularly in the news– And few stories mention specific companies

• What about news stories that do not explicitly mention a company?

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Q: Can we automate creative investing?

“The cicadas of Myanmar emerge every 13 years, while the Brazilian cicadas emerge every 17. Next year they will hatch, simultaneously, for the first time in 221 years. Crops from both countries will be decimated. Unlike Myanmar and Brazil, Indonesia has no cicada population. I was surprised to see Indonesian sesame seed futures priced so low. I made a purchase.”

Silicon Valley (2014), Season,1, Episode 3

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Sesame futures

Cicada news

News 1

News 2

…

News N

…

Security 1 Security MSecurity 2 … …

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Security j

News i

News 1

News 2

…

News N

…

Security 1 Security MSecurity 2 … …

Security jUQM Technologies, Inc., develops, manufactures and sells power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, military and industrial markets. […]

News iThis is dysprosium—if we run out of it, say goodbye to smartphones, MRI scans and hybrid cars. The next gold rush could be in outer space, but the treasures luring modern-day prospectors won't adorn lavish jewelry. They are rare earths, a group of 17 chemical elements with […]

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Our approach• Create SFs for thousands of US companies

based on their official business descriptions• Create SFs of millions of news stories

– in multiple languages• For every day + language, get the aggregate

news SF• Aggregate news SF ∩ company SF => News

Intensity• News intensities then used to predict stock

return, volume, volatility

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News intensity calculationsbit.ly/2cwVA17 http://127.0.0.1:3394/

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Future work• Validate news intensity as a

– risk management signal for stocks and stock portfolios– trading signal for stocks (perhaps in combination with other

variables)• Re-train SF engine on business+news+technology texts• Enrich company SFs with other company-specific texts (in

addition to business descriptions)• From market prices and semantic fingerprints of stocks,

derive “prices” for individual semantic positions– Identify mispriced stocks based on the above

• Test for the information content of “seemingly unrelated” news stories– Perhaps bringing in sentiment analysis

• …

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We are still at the very beginning