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How news and its context drive risk and returns around the world

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  • Calomiris, Charles W.
  • Mamaysky, Harry

Abstract

We develop a classification methodology for the context and content of news articles to predict risk and return in stock markets in 51 developed and emerging economies. A parsimonious summary of news, including topic-specific sentiment, frequency, and unusualness (entropy) of word flow, predicts future country-level returns, volatilities, and drawdowns. Economic and statistical significance are high and larger for year ahead than monthly predictions. The effect of news measures on market outcomes differs by country type and over time. News stories about emerging markets contain more incremental information. Out-of-sample testing confirms the economic value of our approach for forecasting country-level market outcomes.

Suggested Citation

  • Calomiris, Charles W. & Mamaysky, Harry, 2019. "How news and its context drive risk and returns around the world," Journal of Financial Economics, Elsevier, vol. 133(2), pages 299-336.
    • Handle: RePEc:eee:jfinec:v:133:y:2019:i:2:p:299-336
    DOI: 10.1016/j.jfineco.2018.11.009
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    More about this item

    Keywords

    Empirical asset pricing; International markets; Financial news media; Natural language processing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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