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Policy news and stock market volatility

Mar 2019
Working Paper
19-009
By  Scott R. Baker, Nicholas Bloom, Steven J. Davis, Kyle Kost

We create a newspaper based tracker of Equity Market Volatility (EMV), counting the frequency of newspaper articles containing key terms about the (E)conomy, the Stock (M)arket and (V)olatility. This EMV index has a monthly correlation with realized S&P 500 volatility and the VIX of 0.80 and 0.77 respectively. Using this index we find three key results. First, 74 percent of EMV articles mention the Macroeconomic Outlook, 44 percent mention Commodity Market while 30 percent mention referencing Interest Rates. The frequency of Macroeconomic articles surges during recessions while Commodities articles are strongly linked to oil prices, with interest rates mentions relatively constant over time. Second, in terms of policies the major drivers of EMV are Fiscal Policy, Monetary Policy and National Security. More recently, since the election of Donald Trump in 2016 the number of trade policy articles has also increased sharply. Finally, the share of EMV articles containing any policy term has been rising since the 1980s, suggesting policy is playing an increasing role in driving stock-market fluctuations.

Publication Keywords: 
stock market
volatility
Uncertainty