New York Ag Connection - News Helps Drive Stock Market, But Not How You Think

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News Helps Drive Stock Market, But Not How You Think
New York Ag Connection - 07/24/2017

A commonly held belief is that media coverage helps drive the stock market, and this belief is bolstered whenever prices leap or swoon in response to a big economic or corporate event. But new research from Columbia Business School shows that while news indeed affects the performance of stock markets around the world, it happens in complex ways and with timing that -- to the mind of the typical investor -- might be unexpected and counterintuitive.

The study, How News and Its Context Drive Risk and Returns Around the World, examined news reports that covered a range of topics, including macroeconomic and political developments, and activity within financial and commodity markets, and assessed the impact that news reports on these topics had on the market. The researchers, Columbia Business School professors Charles Calomiris, Henry Kaufman Professor of Financial Institutions, and Harry Mamaysky, Associate Professor of Professional Practice, also assessed whether the news report expressed positive or negative sentiment.

The research found that influence on the financial markets was evident from one month to 12 months out from the original news report, with certain phrases and individual words causing higher returns and reduced price swings in developed and emerging markets. The impact of the news reports was greatest after one year, and the researchers suspect that this occurs because of the time it can take investors to fully appreciate the ramifications of what they read about.

"A piece of news may foster economic behavior over time that amplifies the original impact of the news report," says Professor Calomiris. "The delayed response happens because of a 'collective unconscious' aspects of news that may not be understood at the time the news articles appear, yet the news' influence on the market increases its relevance over time."

The research analyzed sentiment and found that positive news proved to be positive in some contexts, producing higher returns, lower volatility, and smaller drawdowns (i.e. maximum losses suffered during an average period). But, surprisingly, news with positive sentiment about the government and corporate sectors predicted negative market reactions.

"Our findings, that the effect of news is context- and time-specific was certainly unexpected," says Professor Mamaysky. "For example, after the financial crisis unusual news stories were associated with positive market reactions, but the opposite was true prior to the financial crisis. It is therefore possible that surprising news is bad in good times and good in bad times."

The research also looked at the impact of news in emerging markets versus developed markets. The study found that news events seem to cause a greater same-day market reaction in developed markets than in emerging markets, perhaps because mature economies are more open and transparent and so news is disseminated faster. It is also possible that emerging economies, being less rigorously regulated, are more prone to information leakage.

Another finding is that emerging markets are more sensitive to macroeconomic news than developed markets; a possible explanation for this is less mature economies undergo fundamental shifts in political and economic regimes that more mature ones largely escape.

Professors Calomiris and Mamaysky developed a classification methodology for the context and content of news articles published by Reuters between April 1998 and December 2015 to predict risk and return in 51 stock markets. Through this study, the researchers found it possible to construct a simple and flexible model to forecast market risk and return from news flow.

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