Policy News and Stock Market Volatility

78 Pages Posted: 2 Apr 2019 Last revised: 31 Jan 2022

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance; National Bureau of Economic Research (NBER)

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER); Hoover Institution

Kyle Kost

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2021

Abstract

We exploit the text in newspapers and 10-K filings to quantify the drivers of aggregate and firm-level stock market volatility. We first create a newspaper-based Equity Market Volatility (EMV) tracker that moves closely with the VIX and the volatility of returns on the S&P 500. Parsing the underlying text, we then construct forty category-specific EMV trackers. News about commodity markets, interest rates, real estate markets, aggregate activity and inflation figure prominently in EMV articles, with large category-specific variation over time. Policy news is another major source of market volatility: 30 percent of EMV articles discuss tax policy, 30 percent discuss monetary policy, and 25 percent refer to some form of regulation. Trade policy news went from a virtual nonfactor in market volatility to a leading source after U.S.-China trade tensions escalated. Next, we use 10-K filings to quantify firm-level exposures to the same forty risk categories. Combining our newspaper-based measures with our textual analysis of 10-K filings, we obtain monthly firm-level risk exposure measures. Finally, we show that these measures are highly statistically significant in explaining the firm-level structure of realized equity market volatilities at the monthly frequency, even after conditioning on firm effects, time effects and industry-time effects.

Keywords: stock market, equity returns, volatility, uncertainty, government policy

JEL Classification: D80, E22, E66, G18, L50

Suggested Citation

Baker, Scott R. and Bloom, Nicholas and Davis, Steven J. and Kost, Kyle, Policy News and Stock Market Volatility (December 10, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-53 , Available at SSRN: https://ssrn.com/abstract=3363862 or http://dx.doi.org/10.2139/ssrn.3363862

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nicholas Bloom

Stanford University - Department of Economics ( email )

Landau Economics Building, Room 231
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-7836 (Phone)

HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Steven J. Davis (Contact Author)

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hoover Institution

434 Galvez Mall
Stanford University
Stanford, CA 94305-6010
United States
773 251 1795 (Phone)

Kyle Kost

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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