Sentiment as a risk indicator: when does it work best?

However, it may respond more rapidly to sudden events, as demonstrated during the 2023 banking turmoil.

In this insight, part of a wider series in collaboration with Probability & Partners, we show how sentiment is a powerful risk indicator in various areas, including individual stocks, commodities, sectors, and global market indices, at different time scales. In this second insight we examine:

1. How sentiment is most effective as an early warning signal of risk, on a global scale;
2. The difference between slow-burn risks and sudden shocks, through three major examples – Covid-19, 2007-2008 financial crisis, the 2023 banking turmoil;
3. The value of news sentiment signal in offering invaluable risk information.