Policy News and Stock Market Volatility

Scott R. Baker; Nicholas Bloom; Steven J. Davis; Kyle J. Kost

doi:10.3386/w25720

Policy News and Stock Market Volatility

Scott R. Baker, Nicholas Bloom, Steven J. Davis & Kyle J. Kost

Working Paper 25720

DOI 10.3386/w25720

Issue Date March 2019

Revision Date May 2025

We use newspapers to create Equity Market Volatility (EMV) trackers at daily and monthly frequencies. Our headline EMV tracker moves closely with the VIX and the S&P500 returns volatility in and out of sample. We exploit the volume of newspaper text to construct forty category-specific EMV trackers. News about commodity markets, interest rates, real estate markets, aggregate activity, and inflation figure prominently in EMV articles. Policy news is another major source of market volatility: 30 percent of EMV articles discuss tax policy, 30 percent discuss monetary policy, and 25 percent refer to some form of regulation. Combining our newspaper-based trackers with textual analysis of 10-K filings, we obtain monthly firm-level risk exposure measures. These measures help explain the cross-sectional structure of realized volatilities and its evolution over time, even after conditioning on firm and time fixed effects.

Many thanks to John Cochrane, two anonymous referees, the editors Bill Schwert and Nikolai Roussanov, and participants at numerous seminars. We gratefully acknowledge financial support from the U.S. National Science Foundation and the University of Chicago Booth School of Business. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Nicholas Bloom
I worked for McKinsey and company as a management consultant from 2001-2002. I have not received any funding from them after that time.

I am part of the Toulouse Network for Information Technology, which carries out research on IT and productivity. From this network I receive an annual honorarium, which is funded by Microsoft.

I do occasional consulting on management practices for government and policy agencies, like the Canadian Government, the World Bank, the European Union, the British Government, and the European Bank of Reconstruction and Development.

I produced a report in 2008 for the World Economic Forum on management practices in private equity for which I received an honorarium.

I occasionally am a paid speaker at corporate events at which I discuss among other things management practices and policy uncertainty.

Steven J. Davis
I own more than $5,000 in stock of Charles River Associates. I own Millennium Economics LLC.
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Scott R. Baker, Nicholas Bloom, Steven J. Davis, and Kyle J. Kost, "Policy News and Stock Market Volatility," NBER Working Paper 25720 (2019), https://doi.org/10.3386/w25720.

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