6 - KU Sentiment, Novelty, and Relevance

Summary

Chapter 6 introduces the Knightian uncertainty sentiment, novelty, and volume indices based on unscheduled corporate news events. The corporate KU Sentiment Index is presented and plotted against US stock market valuation levels over the last 20 years. KU event-months with the highest/lowest sentiment scores are identified. Similarly, the corporate KU Novelty and Relevance Indices are introduced with graphical and descriptive analysis. Taken together, the three filters for highest/lowest sentiment, highest novelty, and highest relevance are interacted with the baseline KU Index from Chapter 5 to identify periods characterized by the highest narrative intensity. Periods of moderately high narrative intensity are also identified. These points of interest will serve as benchmarks for identified breakpoints found in formal structural change tests for stock returns, volatility, volume, and equity index fund flow relationships in Chapter 10.