Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2014:41:
Language, News and Volatility

Hans Byström ()

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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