SOURCE: Columbia Business School

June 28, 2016 10:00 ET

Predicting Market Volatility Just Got Easier

Novel Research from Columbia Business School Helps Investors Interpret Business News

NEW YORK, NY--(Marketwired - June 28, 2016) - Predicting market volatility has always been next to impossible, but now researchers from Columbia Business School have finally cracked the code by developing an innovative way to anticipate market conditions by analyzing the "unusualness" of business news.

Researchers Paul Glasserman and Harry Mamaysky, from Columbia Business School, found that an increase in the "unusualness" of news about a company predicts an increase in stock market volatility. The research, "Does Unusual News Forecast Market Stress," leverages a unique methodology to forecast volatility by analyzing business news articles from Thomson Reuters.

"Financial professionals read the news every day trying to determine the best approach for their investment decisions," said Paul Glasserman, the Jack R. Anderson professor of business at Columbia Business School. "While they access a lot of news, they don't have a systematic way to analyze and interpret everything they read. Now, we have an approach that can change the way people decide to invest by helping them understand the way news impacts markets."

The research validates the importance of "unusualness" in news reporting by identifying meaningful word associations such as, "…the collapse of Lehman" and "cut its price target." Both phrases contain one negative word and equally contribute to an overall measure of negative sentiment -- both important factors in a measure of unusualness.

"We find that the interaction between measures of unusualness and sentiment, whether negative or positive, forecasts market volatility at both the company-specific and aggregate level," said Harry Mamaysky, associate professor of practice at Columbia Business School. "These effects can play out in measuring pricing volatility for up to six months."

This is a much longer time horizon than previous studies have documented. This innovative monitoring method can help the investment community anticipate changes in economic conditions that they would not otherwise be aware of. Investment professionals can use this monitoring method to proactively adjust their client's portfolios as business news is reported.

This analysis is based on more than 360,000 articles on 50 large financial companies, mostly banks and insurers, published in 1996-2014 by Thompson Reuters.

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

About Columbia Business School

Columbia Business School is the only world-class, Ivy League business school that delivers a learning experience where academic excellence meets with real-time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School's transformative curriculum bridges academic theory with unparalleled exposure to real-world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School's faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School's efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School's position at the very center of business, please visit www.gsb.columbia.edu.

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