Managing real time risks and returns: The Thomson Reuters NewsScope Event Indices
As financial markets grow in size and complexity, risk management protocols must also evolve to address more challenging demands. One of the most difficult of these challenges is managing event risk, the risk posed by unanticipated news that causes major market moves over short time intervals. Often cited but rarely managed, event risk has been relegated to the domain of qualitative judgment and discretion because of its heterogeneity and velocity. In this chapter, we describe one initiative aimed at solving this problem. The Thomson Reuters NewsScope Event Indices Project is an integrated framework for incorporating real time news from the Thomson Reuters NewsScope subscription service into systematic investment and risk management protocols. The framework consists of a set of real time event indices each one taking on numerical values between 0 and 100 designed to capture the occurrence of unusual events of a particular kind. Each index is constructed by applying disciplined pattern recognition algorithms to real time news feeds, and validated using econometric methods applied to historical data. 3.