Scandinavian Working Papers in Economics

Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies

No 2013/16: Predicting Stock Price Volatility by Analyzing Semantic Content in Media

Hossein Asgharian () and Sverker Sikström
Additional contact information
Hossein Asgharian: Department of Economics and Knut Wicksell Centre for Financial Studies, Lund University
Sverker Sikström: Department of Psychology, Lund University, Postal: Lund University, Box 7082, S-22007 Lund, Sweden.

Abstract: Current models for predicting volatility do not incorporate information flow and are solely based on historical volatilities. We suggest a method to quantify the semantic content of words in news articles about a company and use this as a predictor of its stock volatility. The results show that future stock volatility is better predicted by our method than the conventional models. We also analyze the functional role of text in media either as a passive documentation of past information flow or as an active source for new information influencing future volatility. Our data suggest that semantic content may take both roles.

Keywords: volatility; information flow; latent semantic analysis; GARCH

JEL-codes: G19

43 pages, September 13, 2013

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