News and Narratives in Financial Systems: Exploiting Big Data for Systemic Risk Assessment

58 Pages Posted: 9 Jan 2018

See all articles by Rickard Nyman

Rickard Nyman

University College London - Centre for the Study of Decision-Making Uncertainty

Sujit Kapadia

Bank of England; European Central Bank (ECB)

David Tuckett

University College London - Centre for the Study of Decision-Making Uncertainty

David Gregory

Bank of England

Paul Ormerod

University College London - Centre for the Study of Decision-Making Uncertainty

Robert Smith

University College London - Centre for the Study of Decision-Making Uncertainty

Multiple version iconThere are 2 versions of this paper

Date Written: January 5, 2018

Abstract

This paper applies algorithmic analysis to large amounts of financial market text-based data to assess how narratives and sentiment play a role in driving developments in the financial system. We find that changes in the emotional content in market narratives are highly correlated across data sources. They show clearly the formation (and subsequent collapse) of very high levels of sentiment — high excitement relative to anxiety — prior to the global financial crisis. Our metrics also have predictive power for other commonly used measures of sentiment and volatility and appear to influence economic and financial variables. And we develop a new methodology that attempts to capture the emergence of narrative topic consensus which gives an intuitive representation of increasing homogeneity of beliefs prior to the crisis. With increasing consensus around narratives high in excitement and lacking anxiety likely to be an important warning sign of impending financial system distress, the quantitative metrics we develop may complement other indicators and analysis in helping to gauge systemic risk.

Keywords: Systemic risk, text mining, big data, sentiment, uncertainty, narratives, forecasting, early warning indicators

JEL Classification: C53, D83, E32, G01, G17

Suggested Citation

Nyman, Rickard and Kapadia, Sujit and Kapadia, Sujit and Tuckett, David and Gregory, David and Ormerod, Paul and Smith, Robert, News and Narratives in Financial Systems: Exploiting Big Data for Systemic Risk Assessment (January 5, 2018). Bank of England Working Paper No. 704, Available at SSRN: https://ssrn.com/abstract=3098729 or http://dx.doi.org/10.2139/ssrn.3098729

Rickard Nyman

University College London - Centre for the Study of Decision-Making Uncertainty ( email )

Gower Street
London, WC1 6BT
United Kingdom

Sujit Kapadia (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

David Tuckett

University College London - Centre for the Study of Decision-Making Uncertainty ( email )

Gower Street
London, WC1 6BT
United Kingdom

HOME PAGE: http://www.ucl.ac.uk/psychoanalysis/unit-staff/david.htm

David Gregory

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Paul Ormerod

University College London - Centre for the Study of Decision-Making Uncertainty ( email )

Gower Street
London, WC1 6BT
United Kingdom

Robert Smith

University College London - Centre for the Study of Decision-Making Uncertainty ( email )

Gower Street
London, WC1 6BT
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
176
Abstract Views
958
rank
46,546
PlumX Metrics