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Policy News and Stock Market Volatility

Scott Baker (), Nicholas Bloom (), Steven Davis () and Kyle J. Kost

No 25720, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We create a newspaper-based Equity Market Volatility (EMV) tracker that moves with the VIX and with the realized volatility of returns on the S&P 500. Parsing the underlying text, we find that 72 percent of EMV articles discuss the Macroeconomic Outlook, and 44 percent discuss Commodity Markets. Policy news is another major source of volatility: 35 percent of EMV articles refer to Fiscal Policy (mostly Tax Policy), 30 percent discuss Monetary Policy, 25 percent refer to one or more forms of Regulation, and 13 percent mention National Security matters. The contribution of particular policy areas fluctuates greatly over time. Trade Policy news, for example, went from a virtual nonfactor in equity market volatility to a leading source after Donald Trump’s election and especially after the intensification of U.S-China trade tensions. The share of EMV articles with attention to government policy rises over time, reaching its peak in 2017-18. We validate our measurement approach in various ways. For example, tailoring our EMV tracker to news about petroleum markets yields a measure that rises and falls with the implied and realized volatility of oil prices.

JEL-codes: E44 G12 G18 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-rmg
Note: AP EFG ME
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