A novel approach to portfolio selection using news volume and sentiment

• Published date: 01 December 2023
• Author: Kin‐Yip Ho,Kun Tracy Wang,Wanbin Walter Wang
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/irfi.12427

SHORT REPORT

A novel approach to portfolio selection

using news volume and sentiment

Kin-Yip Ho | Kun Tracy Wang

1

| Wanbin Walter Wang

2

1

Research School of Accounting, The

Australian National University, Canberra,

Australian Capital Territory, Australia

2

Research School of Finance, Actuarial

Studies and Statistics, The Australian National

University, Canberra, Australian Capital

Territory, Australia

Correspondence

Kun Tracy Wang, Research School of

Accounting, PAP Moran Building 021, The

Australian National University, Canberra,

ACT 2601, Australia.

Email: kun.wang@anu.edu.au

Abstract

In this study, we develop a novel approach to portfolio

diversification by integrating information on news volume

and sentiment with the k-nearest neighbors (kNN) algo-

rithm. Our empirical analysis indicates that high news vol-

ume contributes to portfolio risk, whereas news sentiment

contributes to portfolio return. Based on these findings, we

propose a kNN algorithm for portfolio selection. Our in-

sample and out-of-sample tests suggest that the proposed

kNN portfolio selection approach outperforms the bench-

mark index portfolio. Overall, we show that incorporating

news volume and sentiment into portfolio selection can

enhance portfolio performance by improving returns and

reducing risk.

KEYWORDS

kNN, Markowitz's mean–variance optimization method, news

media, news sentiment, portfolio selection

JEL CLASSIFICATION

C53, G11

1|INTRODUCTION

How to build a robust portfolio strategy to secure high profits with low risks is attracting extensive interest from

scholars and practitioners. Motivated by the growing interest in the impact of news on stock prices and the use of

big data analytic techniques to build portfolios and predict stock market movement (e.g., Ho et al., 2013;

Received: 6 September 2022 Revised: 5 April 2023 Accepted: 23 July 2023

DOI: 10.1111/irfi.12427

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. International Review of Finance published by John Wiley & Sons Australia, Ltd on behalf of International Review

of Finance Ltd.

International Review of Finance. 2023;23:903–917. wileyonlinelibrary.com/journal/irfi 903