The Strategist

IMF: Economy news affect global economy

12/12/2018 - 09:17

Tone of economic news makes it possible to predict state of stock markets more accurately than traditional volatility indices, found the International Monetary Fund study. At the same time, global news has a more significant and lasting effect on quotes than local ones. Researchers, who analyzed 4.5 million messages over 15 years, calculated that the impact of international news was four times more pronounced during “bearish” trends compared to “bullish” trends.

Nature of the news feed is highly likely to predict dynamics of stock markets in both developed and developing countries, a team of researchers from the World Bank, the International Monetary Fund (IMF) and the University of Southern California found. The analysis was carried out on the basis of 4.5 million reports from Reuters, published from 1991 to 2015 (a quarter of them came from the United States).

Local news (both optimistic and pessimistic for the market) have an impact that lasts for only a few days. The effect of reports on the state of the global economy (with mention of more than one country) lasts much longer (on average more than three weeks) and has a greater impact on quotes, on average shifting them by 25 basis points (local news - by five). Positive news background is usually created by positive financial and corporate news from developed countries, primarily the United States. The negative background is mainly associated with economic and political messages from emerging markets. This trend is not the result of economic crisis events, the report says.

In addition to changes in asset prices, news tonality also affects capital flows between countries (this conclusion was drawn from 2007–2015 data). In the case of emerging markets, publication of positive local news increases flow of funds by only a few days. In relation to the global economy, optimism leads to longer growth, which peaks only after two weeks.

Interestingly, the influence of international news is four times more pronounced with the global “bearish” trend (when most players expect a drop in prices) than with a bullish one, and investors are more sensitive to news during market crashes, the authors point out. Moreover, the researchers calculated tonality index of international news (takes into account content of words indicating optimism or pessimism of the statement). It better explains variability of returns on investments in stock markets in different countries than traditional volatility indices, such as VIX (measures the risk perception by investors, its growth indicates a decrease in market predictability). The VIX shocks have a more pronounced effect on the markets, but the index misses many smaller shocks that are easy to track, given the news background.