News and Idiosyncratic Volatility: The Public Information Processing Hypothesis*

A Theory of Intraday Patterns: Volume and Price Variability

Robert Engle, Martin Klint Hansen, Ahmet K Karagozoglu and Asger Lunde

Journal of Financial Econometrics, 2021, vol. 19, issue 1, 1-38

Abstract: Motivated by the recent availability of extensive electronic news databases and advent of new empirical methods, there has been renewed interest in investigating the impact of financial news on market outcomes for individual stocks. We develop the information processing hypothesis of return volatility to investigate the relation between firm-specific news and volatility. We propose a novel dynamic econometric specification and test it using time series regressions employing a machine learning model selection procedure. Our empirical results are based on a comprehensive dataset comprised of more than 3 million news items for a sample of 28 large U.S. companies. Our proposed econometric specification for firm-specific return volatility is a simple mixture model with two components: public information and private processing of public information. The public information processing component is defined by the contemporaneous relation with public information and volatility, while the private processing of public information component is specified as a general autoregressive process corresponding to the sequential price discovery mechanism of investors as additional information, previously not publicly available, is generated and incorporated into prices. Our results show that changes in return volatility are related to public information arrival and that including indicators of public information arrival explains on average 26% (9–65%) of changes in firm-specific return volatility.

Keywords: firm-specific news; realized volatility; public information arrival; information processing hypothesis of return volatility (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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