Construction of Macroeconomic Uncertainty Indices for Financial Market Analysis Using a Supervised Topic Model

Kyoto Yono,Hiroki Sakaji,Kiyoshi Izumi,Takashi Shimada,Hiroyasu Matsushima

doi:10.3390/jrfm13040079

Kyoto Yono, Hiroki Sakaji + Show 3 more

Open Access

https://doi.org/10.3390/jrfm13040079

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Abstract

The uncertainty in the financial market, whether the US—China trade war will slow down the global economy or not, Federal Reserve Board (FRB) policy to increase the interest rates, or other similar macroeconomic events can have a crucial impact on the purchase or sale of financial assets. In this study, we aim to build a model for measuring the macroeconomic uncertainty based on the news text. Further, we proposed an extended topic model that uses not only news text data but also numeric data as a supervised signal for each news article. Subsequently, we used our proposed model to construct macroeconomic uncertainty indices. All these indices were similar to those observed in the historical macroeconomic events. The correlation was higher between the volatility of the market and uncertainty indices with larger expected supervised signal compared to uncertainty indices with the smaller expected supervised signal. We also applied the impulse response function to analyze the impact of the uncertainty indices on financial markets.

Highlights

Macroeconomic uncertainty is a factor that influences the purchase and sale of financial assets
When the uncertainty about the EU economy is high and the investors are uncertain about the economic growth in the country except for the US, they allocate their assets to US assets and increase the safe assets such as bonds and cash
We constructed uncertainty indices based on the topics generated by supervised Latent Dirichlet Allocation (sLDA)

Summary

Introduction

Macroeconomic uncertainty is a factor that influences the purchase and sale of financial assets. The survey is about the institutional investor’s view of the world economy and its asset class allocation. When the uncertainty about a certain country is high, the institutional investor reduces the weight of the risky assets of a certain country and allocate to the safe assets such as bonds and cash. When the uncertainty about the EU economy is high and the investors are uncertain about the economic growth in the country except for the US, they allocate their assets to US assets and increase the safe assets such as bonds and cash. On the contrary, when the uncertainty about a certain country disappears, the investors buy the assets of a certain country and reduce the safe assets such as bonds and cash

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