Constructing Equity Investment Strategies Using Analyst Reports and Regime Switching Models

Rei Taguchi; Hikaru Watanabe; Hiroki Sakaji; Kiyoshi Izumi; Kenji Hiramatsu

doi:10.3389/frai.2022.865950

Constructing Equity Investment Strategies Using Analyst Reports and Regime Switching Models

Front Artif Intell. 2022 May 18:5:865950. doi: 10.3389/frai.2022.865950. eCollection 2022.

Authors

Rei Taguchi¹, Hikaru Watanabe², Hiroki Sakaji¹, Kiyoshi Izumi¹, Kenji Hiramatsu³

Affiliations

¹ School of Engineering, The University of Tokyo, Tokyo, Japan.
² Faculty of Engineering, The University of Tokyo, Tokyo, Japan.
³ IFIS Japan Limited, Tokyo, Japan.

Abstract

This study demonstrates whether analysts' sentiments toward individual stocks are useful for stock investment strategies. This is achieved by using natural language processing to create a polarity index from textual information in analyst reports. In this study, we performed time series forecasting for the created polarity index using deep learning, and clustered the forecasted values by volatility using a regime switching model. In addition, we constructed a portfolio from stock data and rebalanced it at each change point of the regime. Consequently, the investment strategy proposed in this study outperforms the benchmark portfolio in terms of returns. This suggests that the polarity index is useful for constructing stock investment strategies.

Keywords: BERT; Hidden Markov Model; financial market; regime switching model; trading strategy.