High quality topic extraction from business news explains abnormal financial market volatility
AbstractUnderstanding 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 InfoPaper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 002.
Length: 17 pages
Date of creation: Oct 2012
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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
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