Working Papers, Department of Economics, Lund University
Language, News and Volatility
Abstract: I use Google News TM to study the relation between news
volumes and stock market volatilities. More than nine million stock
market-related news stories in English and (Mandarin) Chinese are collected
and the dynamics of the news volume and the stock market volatility is
compared in both the Anglophone world and the Sinophone world. I find that
the stock market volatility and the number of publicly available global
news stories are strongly linked to each other in both languages.
Contemporaneous correlations between news and volatility are positive and
highly significant, and regressions tell us that the directional link
between news and volatility rather is from news to volatility than vice
versa. In out-of-sample evaluations of volatility forecasts I find news
volumes to improve forecasts, regardless of language. The relationship
between news and volatility is weakest in mainland China and a possible
reason for this is that Chinese retail investors do not read (traditional)
news, neither in Chinese nor in English. The results suggest that news
could be used in volatility-related financial applications such as
GARCH-models or VIX-like fear indexes.
Keywords: news aggregator; news; language; volatility; stock market; Chinese; Mandarin; GARCH; VIX; (follow links to similar papers)
JEL-Codes: C82; D80; G10; (follow links to similar papers)
43 pages, November 27, 2014
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