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News- Based Indices on Country Fundamentals: Do They Help Explain Sovereign Credit Spread Fluctuations?

Author

Listed:
  • András Fülöp

    (ESSEC Business School)

  • Zalán Kocsis

    (Magyar Nemzeti Bank (Central Bank of Hungary))

Abstract

This paper revisits the discussion about the role that fundamentals play in asset prices using sovereign credit spread data. We augment the standard macroeconomic proxy set by text-based measures of country and global fundamentals from a database of Reuters news articles between 2007 and 2016. We use a novel methodology that matches fundamental topic expressions and directly links them to tonality and geography information within the text. Our approach resolves several problems of extant text mining methods. We verify that our news indices capture fundamental information within news articles and are uncorrelated with measures of liquidity and investor sentiment. These news indices explain a large part of sovereign credit spread changes not captured by traditional fundamental proxies and thus support a significantly larger role for fundamentals. This additional information derives primarily from omitted expectations and concerns about global fundamentals. We also show that a large part of the covariance between the VIX index and sovereign spreads is related to these global fundamentals.

Suggested Citation

  • András Fülöp & Zalán Kocsis, 2018. "News- Based Indices on Country Fundamentals: Do They Help Explain Sovereign Credit Spread Fluctuations?," MNB Working Papers 2018/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2018/1
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    File URL: http://www.mnb.hu/letoltes/mnb-wp-2018-1-final-1.pdf
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    Cited by:

    1. Montes, Gabriel Caldas & Nicolay, Rodolfo & Pereira, Flavio, 2022. "Does fiscal sentiment matter for sovereign risk?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 18-30.

    More about this item

    Keywords

    Financial media; textual data; regular expressions; sovereign credit risk.;
    All these keywords.

    JEL classification:

    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G1 - Financial Economics - - General Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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