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Stock market volatility and public information flow: A non-linear perspective

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  • Bertelsen, Kristoffer Pons
  • Borup, Daniel
  • Jakobsen, Johan Stax

Abstract

The relationship between the level of stock market volatility and public information flow is non-linear, resembling a bell-shaped function. Medium levels of information flow generate heightened volatility, whereas weak and strong information flows do not, regardless of whether news are negative or positive. This novel empirical finding is established in a new realized GARCH model with time-varying intercept, measuring changes in the overall volatility level, which is governed by a new measure of daily macroeconomic news flow. We also device a test for model specification. States of medium information flow are characterized by elevated disagreement about the future stance of the economy compared to states of weak or strong information flow, such that our findings are explained by disagreement equilibrium-based models. We confirm our findings on international data.

Suggested Citation

  • Bertelsen, Kristoffer Pons & Borup, Daniel & Jakobsen, Johan Stax, 2021. "Stock market volatility and public information flow: A non-linear perspective," Economics Letters, Elsevier, vol. 204(C).
    • Handle: RePEc:eee:ecolet:v:204:y:2021:i:c:s0165176521001828
    DOI: 10.1016/j.econlet.2021.109905
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    More about this item

    Keywords

    News analytics; Mixture-distribution hypothesis; Realized GARCH; Smooth transitioning; Stock market volatility; GARCH-MIDAS;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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