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Clustering asset markets based on volatility connectedness to political news

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  • Abdollahi, Hooman
  • Junttila, Juha-Pekka
  • Lehkonen, Heikki

Abstract

To assess similarities in international asset markets’ responses to political news, we construct a political news index using advanced natural language processing. We then examine how the volatility across international asset markets is connected to the development of our political news index by measuring the daily directional connectedness using a VAR-based framework. Finally, we apply an unsupervised algorithm to cluster markets based on their volatility connectedness to political news. Our analysis reveals eight distinct clusters that reflect the markets’ sensitivities to political dynamics. This data-driven analysis offers insights into the influence of political developments on market volatility.

Suggested Citation

  • Abdollahi, Hooman & Junttila, Juha-Pekka & Lehkonen, Heikki, 2024. "Clustering asset markets based on volatility connectedness to political news," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:intfin:v:93:y:2024:i:c:s1042443124000702
    DOI: 10.1016/j.intfin.2024.102004
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    More about this item

    Keywords

    Markets and media; Volatility connectedness; Market clustering; Political news; Large language model;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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