Stock market uncertainty determination with news headlines: A digital twin approach

Abstract

We present a novel digital twin model that implements advanced artificial intelligence techniques to robustly link news and stock market uncertainty. On the basis of central results in financial economics, our model efficiently identifies, quantifies, and forecasts the uncertainty encapsulated in the news by mirroring the human mind's information processing mechanisms. After obtaining full statistical descriptions of the timeline and contextual patterns of the appearances of specific words, the applied data mining techniques lead to the definition of regions of homogeneous knowledge. The absence of a clear assignment of informative elements to specific knowledge regions is regarded as uncertainty, which is then measured and quantified using Shannon Entropy. As compared with standard models, the empirical analyses demonstrate the effectiveness of this approach in anticipating stock market uncertainty, thus showcasing a meaningful integration of natural language processing, artificial intelligence, and information theory to comprehend the perception of uncertainty encapsulated in the news by market agents and its subsequent impact on stock markets.

Keywords

• stock market
• efficient market theory
• market selection theory
• uncertainty
• digital twin
• natural language processing
• artificial intelligence
• shannon entropy