Does Unusual News Forecast Market Stress?
75 Pages Posted: 19 Jul 2015 Last revised: 20 Apr 2018
Date Written: March 2018
We find that an increase in the ``unusualness'' of news with negative sentiment predicts an increase in stock market volatility. Similarly, unusual positive news forecasts lower volatility. Our analysis is based on more than 360,000 articles on 50 large financial companies, published in 1996--2014. Unusualness interacted with sentiment forecasts volatility -- at both the company-specific and aggregate level -- several months into the future. Furthermore, unusual news is reflected in volatility more slowly at the aggregate than at the company-specific level. News measures derived from articles explicitly about the ``market'' -- which are more easily accessible to investors -- do not forecast future volatility. The observed responses of volatility to news may be explained by attention constraints on investors.
Keywords: asset pricing, financial news media, natural language processing, rational inattention
JEL Classification: G12, G14, D83
Suggested Citation: Suggested Citation