Abstract: Stock market volatility forecasting is a task relevant to assessing market risk. We investigate the interaction between news and prices for the one-day-ahead volatility prediction using state-of-the-art deep learning approaches. The proposed models are trained either end-to-end or using sentence encoders transfered from other tasks. We evaluate a broad range of stock market sectors, namely Consumer Staples, Energy, Utilities, Heathcare, and Financials. Our experimental results show that adding news improves the volatility forecasting as compared to the mainstream models that rely only on price data. In particular, our model outperforms the widely-recognized GARCH(1,1) model for all sectors in terms of coefficient of determination $R^2$, $MSE$ and $MAE$, achieving the best performance when training from both news and price data.

Introduction: Natural Language Processing (NLP) has increasingly attracted the attention of the financial community. This trend can be explained by at least three major factors. The first factor refers to the business perspective. It is the economics of gaining competitive advantage using alternative sources of data and going beyond historical stock prices, thus, trading by analyzing market news automatically. The second factor is the major advancements in the technologies to collect, store, and query massive amounts of user-generated data almost in real-time. The third factor refers to the progress made by the NLP community in understanding unstructured text. Over the last decades the number of studies using NLP for financial forecasting has experienced exponential growth. According to BIBREF0 , until 2008, less than five research articles were published per year mentioning both “stock market” and “text mining” or “sentiment analysis” keywords. In 2012, this number increased to slightly more than ten articles per year. The last numbers available for 2016 indicates this has increased to sixty articles per year. The ability to mechanically harvest the sentiment from texts using NLP has shed light on conflicting theories of financial economics. Historically, there has been two differing views on whether disagreement among market participants induces more trades. The “non-trade theorem” BIBREF1 states that assuming all market participants have common knowledge about a market event, the level of disagreement among the participants does not increase the number of trades but only leads to a revision of the market quotes. In contrast, the theoretically framework proposed in BIBREF2 advocates that disagreement among market participants increases trading volume. Using textual data from Yahoo and RagingBull.com message boards to measure the dispersion of opinions (positive or negative) among traders, it was shown in BIBREF3 that disagreement among users' messages helps to predict subsequent trading volume and volatility. Similar relation between disagreement and increased trading volume was found in BIBREF4 using Twitter posts. Additionally, textual analysis is adding to the theories of medium-term/long-term momentum/reversal in stock markets BIBREF5 . The unified Hong and Stein model BIBREF6 on stock's momentum/reversal proposes that investors underreact to news, causing slow price drifts, and overreact to price shocks not accompanied by news, hence inducing reversals. This theoretical predicated behaviour between price and news was systematically estimated and supported in BIBREF7 , BIBREF8 using financial media headlines and in BIBREF9 using the Consumer Confidence Index® published by The Conference Board BIBREF10 . Similarly, BIBREF11 uses the Harvard IV-4 sentiment lexicon to count the occurrence of words with positive and negative connotation of the Wall Street Journal showing that negative sentiment is a good predictor of price returns and trading volumes. Accurate models for forecasting both price returns and volatility are equally important in the financial domain. Volatility measures how wildly the asset is expected to oscillate in a given time period and is related to the second moment of the price return distribution. In general terms, forecasting price returns is relevant to take speculative positions. The volatility, on the other hand, measures the risk of these positions. On a daily basis, financial institutions need to assess the short-term risk of their portfolios. Measuring the risk is essential in many aspects. It is imperative for regulatory capital disclosures required by banking supervision bodies. Moreover, it is useful to dynamically adjust position sizing accordingly to market conditions, thus, maintaining the risk within reasonable levels. Although, it is crucial to predict the short-term volatility from the financial markets application perspective, much of the current NLP research on volatility forecasting focus on the volatility prediction for very long-term horizons (see BIBREF12 , BIBREF13 , BIBREF14 , BIBREF15 , BIBREF16 ). Predominately, these works are built on extensions of the bag-of-words representation that has the main drawback of not capturing word order. Financial forecasting, however, requires the ability to capture semantics that is dependent upon word order. For example, the headline “Qualcomm sues Apple for contract breach” and “Apple sues Qualcomm for contract breach” trigger different responses for each stock and for the market aggregated index, however, they share the same bag-of-words representation. Additionally, these works use features from a pretrained sentiment analyis model to train the financial forecasting model. A key limitation of this process is that it requires a labelled sentiment dataset. Additionally, the error propagation is not end-to-end. In this work, we fill in the gaps of volatility prediction research in the following manner:

Question: Which stock market sector achieved the best performance?
Answer: Energy with accuracy of 0.538