Enhancing Equity Trading Strategies and Trade Execution using Sentiment and Illiquidity

Liquidity is one of the great enigmas of the financial markets. The performance of many of the financial innovations of the past few decades, from derivatives to hedge fund strategies, are crucially dependent on market liquidity. Transacting on a financial exchange involves impacting the market to a degree, the depth of the impact being dependent on how liquid the market is over the period of time that the transaction takes place. An edge in understanding the relationship between liquidity and market impact, both at the individual trade level and at the level of the entire market, is important in achieving superior investment performance. This is particularly true for levered investment strategies and products where even small changes in liquidity can significantly affect performance.

In this white paper we aim to show that using news sentiment information in conjunction with measures of illiquidity significantly improves the performance of a set of base trading strategies
 

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