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High quality topic extraction from business news explains abnormal financial market volatility

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Author Info

  • Ryohei Hisano

    (ETH Zurich, Department of Management,Technology and Economics; The Canon Institute of Global Studies)

  • Didier Sornette

    (ETH Zurich, Department of Management,Technology and Economics; Swiss Finance Institute)

  • Takayuki Mizuno

    (Department of Computer Science,Graduate school of SIE, University of Tsukuba; The Canon Institute of Global Studies;The University of Tokyo,Graduate School of Economics)

  • Takaaki Ohnishi

    (The Canon Institute of Global Studies; The University of Tokyo,Graduate School of Economics)

  • Tsutomu Watanabe

    (The Canon Institute of Global Studies; The University of Tokyo,Graduate School of Economics)

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    Abstract

    Understanding the mutual relationships between information flows and social activity in society today is one of the cornerstones of the social sciences. In financial economics, the key issue in this regard is understanding and quantifying how news of all possible types (geopolitical, environmental, social, financial, economic, etc.) affect trading and the pricing of firms in organized stock markets. In this paper we seek to address this issue by performing an analysis of more than 24 million news records provided by Thompson Reuters and of their relationship with trading activity for 205 major stocks in the S&P US stock index. We show that the whole landscape of news that affect stock price movements can be automatically summarized via simple regularized regressions between trading activity and news information pieces decomposed, with the help of simple topic modeling techniques, into their “thematic” features. Using these methods, we are able to estimate and quantify the impacts of news on trading. We introduce network-based visualization techniques to represent the whole landscape of news information associated with a basket of stocks. The examination of the words that are representative of the topic distributions confirms that our method is able to extract the significant pieces of information influencing the stock market. Our results show that one of the most puzzling stylized fact in financial economies, namely that at certain times trading volumes appear to be “abnormally large,” can be explained by the flow of news. In this sense, our results prove that there is no “excess trading,” if the news are genuinely novel and provide relevant financial information.

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    Bibliographic Info

    Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 002.

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    Length: 17 pages
    Date of creation: Oct 2012
    Date of revision:
    Handle: RePEc:upd:utppwp:002

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    Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
    Phone: +81-3-3812-2111
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    Web page: http://www.e.u-tokyo.ac.jp/
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    References

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    1. David H. Cutler & James M. Poterba & Lawrence H. Summers, 1988. "What Moves Stock Prices?," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 487, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Umit G. Gurun & Alexander W. Butler, 2012. "Don't Believe the Hype: Local Media Slant, Local Advertising, and Firm Value," Journal of Finance, American Finance Association, American Finance Association, vol. 67(2), pages 561-598, 04.
    3. Armand Joulin & Augustin Lefevre & Daniel Grunberg & Jean-Philippe Bouchaud, 2008. "Stock price jumps: news and volume play a minor role," Papers 0803.1769, arXiv.org.
    4. Ito, Takatoshi & Roley, V. Vance, 1987. "News from the U.S. and Japan : Which moves the yen/dollar exchange rate?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 19(2), pages 255-277, March.
    5. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 421-36, June.
    6. Oral Erdogan & Ari Yezegel, 2009. "The news of no news in stock markets," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(8), pages 897-909.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
    8. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 555-74, May.
    9. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, American Finance Association, vol. 62(3), pages 1139-1168, 06.
    10. Zhi Da & Joseph Engelberg & Pengjie Gao, 2011. "In Search of Attention," Journal of Finance, American Finance Association, American Finance Association, vol. 66(5), pages 1461-1499, October.
    11. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, American Finance Association, vol. 64(2), pages 709-749, 04.
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