A recently revealed Columbia Business School study examines how news helps drive the stock market in some pretty unusual ways.
“How News and Its Context Drive Risk and Returns Around the World” was co-authored by Columbia’s Henry Kaufman Professor of Financial Institutions Charles Calomiris and Associate Professor of Professional Practice Harry Mamaysky. The study surveyed the positive and negative impacts of news on macroeconomic and political developments, and activity within financial and commodity markets, among other topics.
Professor Calomiris explains, “A piece of news may foster economic behavior over time that amplifies the original impact of the news report. The delayed response happens because of a ‘collective unconscious’ aspects of news that may not be understood at the time the news articles appear, yet the news’ influence on the market increases its relevance over time.”
The study found that positive news produced “higher returns, lower volatility and smaller drawdowns” but also predicted negative market reactions when news attached a positive sentiment to the government and corporate sectors.
News and events, according to the study, seem to cause a “greater same-day market reaction in developed markets than in emerging markets.” Emerging markets are also “more sensitive to macroeconomic news than developed markets” perhaps because “less mature economies undergo fundamental shifts in political and economic regimes that more mature ones largely escape.”
Calomiris and Mamaysky found that the impact of news on financial markets manifested anywhere one-to-twelve months from the original report, with the greatest impact after one year. They suspect this phenomenon occurs due to the time it can take “investors to fully appreciate the ramifications of what they read about.”
Data used in the study was gathered from 51 separate stock markets between 1998 and 2015 by Reuters. “Through this study, the researchers found it possible to construct a simple and flexible model to forecast market risk and return from news flow,” the school notes.