Do Financial Companies Communicate to One Another in the News? (Application of Multivariate Hawkes Graphs to Uncover Granger Causality of Financial News)

Abstract

A considerable amount of current research in financial business addresses the influence of news and social media on stock returns and volatility. Although news data are used in many applications, the mutual relationship among public announcements remains unclear. Moreover, the majority of studies are conducted using aggregated data, which are less effective in detecting causal links than observations of higher frequency. This paper provides evidence of self and mutual triggering of news announcements in the financial sector. It is proposed that the news arrival times be modelled as a multivariate Hawkes process to test the Granger causality of company-specific news and to detect the most influential companies. Based on this information, a novel method of constructing a composite news intensity index (NII) is presented. The NII demonstrates the ability to timeously describe the uncertainty in financial markets. The proposed measure Granger causes VIX at 6-month lag and can therefore be used to diagnose the health of a financial system.

Keywords: Early Warning Indicator, Financial Contagion, High-Dimensional Hawkes Graphs, Sentiment Analysis

JEL Classification: C55, C58, G32