Working Paper: NBER ID: w25720
Authors: Scott R. Baker; Nicholas Bloom; Steven J. Davis; Kyle J. Kost
Abstract: We create a newspaper-based Equity Market Volatility (EMV) tracker that moves with the VIX and with the realized volatility of returns on the S&P 500. Parsing the underlying text, we find that 72 percent of EMV articles discuss the Macroeconomic Outlook, and 44 percent discuss Commodity Markets. Policy news is another major source of volatility: 35 percent of EMV articles refer to Fiscal Policy (mostly Tax Policy), 30 percent discuss Monetary Policy, 25 percent refer to one or more forms of Regulation, and 13 percent mention National Security matters. The contribution of particular policy areas fluctuates greatly over time. Trade Policy news, for example, went from a virtual nonfactor in equity market volatility to a leading source after Donald Trump’s election and especially after the intensification of U.S-China trade tensions. The share of EMV articles with attention to government policy rises over time, reaching its peak in 2017-18. We validate our measurement approach in various ways. For example, tailoring our EMV tracker to news about petroleum markets yields a measure that rises and falls with the implied and realized volatility of oil prices.
Keywords: policy news; stock market volatility; equity market volatility; fiscal policy; monetary policy
JEL Codes: E44; G12; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy news (J18) | stock market volatility (G17) |
| changes in policy-related news (O24) | fluctuations in equity market volatility (G17) |
| EMV tracker (Y10) | VIX (C58) |
| EMV tracker (Y10) | realized volatility of the S&P 500 (G17) |
| EMV tracker tailored to petroleum markets (Q47) | oil price volatility (Q31) |