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Into the Unknown: Uncertainty, Foreboding and Financial Markets

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  • Smita Roy Trivedi

    (National Institute of Bank Management, NIBM Campus, NIBM PO)

Abstract

While the link between financial market movement and economic policy uncertainty indices is well-established in literature, uncertainty in the form of ‘foreboding’ emanating from catastrophic events has not been explored in literature. This paper explores “foreboding”, which reflects uncertainty at its extreme, following the Covid-19 pandemic. Using Natural Language Processing on minute-by-minute news data, I construct two Foreboding Indices, representing ‘foreboding’ or ‘fearful apprehension’, for 28,622 Covid-related news for the period July 2020–August 2021. The impact of foreboding on financial market volatility is explored using a logistic regression model. Both the indices show a marked increase in June–July, 2020, in January 2021, April, 2021, and July–August, 2021 and have a positive impact on volatility for hourly S&P 500 Index. Understanding of foreboding sentiment is crucial for central banks looking to monitor financial market volatility. Appropriate signaling in accordance to sentiment can help central banks handle detrimental impacts of market volatility. Moreover, FI can be used for market practitioners to gauge the sentiment and take effective trading decisions.

Suggested Citation

  • Smita Roy Trivedi, 2024. "Into the Unknown: Uncertainty, Foreboding and Financial Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(1), pages 1-23, March.
    • Handle: RePEc:kap:apfinm:v:31:y:2024:i:1:d:10.1007_s10690-023-09404-z
    DOI: 10.1007/s10690-023-09404-z
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    Keywords

    Uncertainty; Foreboding Index; Natural Language Processing (NLP); Market volatility;
    All these keywords.

    JEL classification:

    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General

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