Does Unusual News Forecast Market Stress?

Abstract

We find that an increase in the 'unusualness' of news with negative sentiment predicts an increase in stock market volatility. Similarly, unusual positive news forecasts lower volatility. Our analysis is based on more than 360,000 articles on 50 large financial companies, mostly banks and insurers, published in 1996-2014. We find that the interaction between measures of unusualness and sentiment forecasts volatility at both the company-specific and aggregate level. These effects persist for several months. The observed behavior of volatility in our analysis can be explained by attention constraints on investors.