Alternative Data

Financial data plays an integral role in the decision-making process in finance. Economic actors increasingly rely on non-financial data, broadly classified as alternative data. Using data sources that are not widely available can provide great value; however, collecting, validating, and maintaining datasets is known to be very costly. The situation is changing with recent advances in big data technologies that allow for new data sources to be collected, transferred, and processed efficiently at a lower cost. Furthermore, a large universe of alternative datasets is now available for purchase from an ever-increasing pool of vendors. Currently, alternative data stems from a multitude of sources. A large segment is occupied by data generated from internet activity, such as text data, images, and web traffic logs from a variety of sources such as news sites, chat boards, e-commerce websites, job search websites, and social media platforms. Other common types of alternative data include retail transaction data, credit card data, data accessed through the Freedom of Information Act, and satellite imagery. Unlike traditional financial data, alternative data points are not easily quantifiable and require a great deal of context for analysis. This chapter presents an overview of the contemporary alternative data landscape, detailing the unique risks, challenges, and opportunities associated with its use. We show that as the cost of acquiring and processing data continues to decline, we can expect the adoption of alternative data to keep accelerating into the future.