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Macroeconomic News Sentiment: Enhanced Risk Assessment for Sovereign Bonds

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  • Christina Erlwein-Sayer

    (OptiRisk Systems, Uxbridge UB9 4DA, UK)

Abstract

We enhance the modelling and risk assessment of sovereign bond spreads by taking into account quantitative information gained from macro-economic news sentiment. We investigate sovereign bonds spreads of five European countries and improve the prediction of spread changes by incorporating news sentiment from relevant entities and macro-economic topics. In particular, we create daily news sentiment series from sentiment scores as well as positive and negative news volume and investigate their effects on yield spreads and spread volatility. We conduct a correlation and rolling correlation analysis between sovereign bond spreads and accumulated sentiment series and analyse changing correlation patterns over time. Market regimes are detected through correlation series and the impact of news sentiment on sovereign bonds in different market circumstances is investigated. We find best-suited external variables for forecasts in an ARIMAX model set-up. Error measures for forecasts of spread changes and volatility proxies are improved when sentiment is considered. These findings are then utilised to monitor sovereign bonds from European countries and detect changing risks through time.

Suggested Citation

  • Christina Erlwein-Sayer, 2018. "Macroeconomic News Sentiment: Enhanced Risk Assessment for Sovereign Bonds," Risks, MDPI, vol. 6(4), pages 1-27, December.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:4:p:141-:d:188723
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    References listed on IDEAS

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    Cited by:

    1. Esteban Serrano-Monge, 2022. "Inferences from Portfolio Theory and Efficient Market Hypothesis to the Impact of Social Media on Sovereign Debt: Colombia, Ecuador, and Peru," JRFM, MDPI, vol. 15(4), pages 1-16, March.
    2. Asger Lunde & Miha Torkar, 2020. "Including news data in forecasting macro economic performance of China," Computational Management Science, Springer, vol. 17(4), pages 585-611, December.
    3. Philipp Mohl & Gilles Mourre & Sven Langedijk & Martijn Hoogeland, 2021. "Does Media Visibility Make EU Fiscal Rules More Effective?," European Economy - Discussion Papers 155, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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