The future of systemic risk modeling will combine quantitative data and textual analysis to forecast medium-term risks. We develop a classification methodology for the context and content of news articles to predict risk and return in stock markets in 51 developed and emerging economies. A parsimonious summary of news, including topic-specific sentiment, frequency, and unusualness of word flow, predicts future country-level returns, volatilities, and drawdowns. Economic and statistical significance are high and larger for year-ahead than monthly predictions. The effect of news measures on market outcomes differs by country type and over time. News stories about emerging markets contain more incremental information. Out-of-sample testing confirms the efficacy of our approach for forecasting country-level market outcomes.
This seminar is in partnership between Global Risk Institute and Industrial Engineering and Operations Research at Columbia University.
This seminar is also part of the Quantitative Finance Weekly Seminar series with Columbia Business School, NYU Tandon School of Finance and Risk Engineering, NYU Courant Institute of Mathematical Sciences, Bloomberg LP and the International Association of Quantitative Finance (IAQF).
Charles W. Calomiris is Henry Kaufman Professor of Financial Institutions at Columbia Business School, Director of the Business School’s Program for Financial Studies and its Initiative on Finance and Growth in Emerging Markets, and a professor at Columbia’s School of International and Public Affairs. His research spans the areas of banking, corporate finance, financial history and monetary economics. He is a Distinguished Visiting Fellow at the Hoover Institution, a Fellow at the Manhattan Institute, a member of the Shadow Open Market Committee and the Financial Economists Roundtable, and a Research Associate of the National Bureau of Economic Research. Professor Calomiris is past president of the International Atlantic Economic Society, and has served on numerous committees, including the Advisory Scientific Committee of the European Systemic Risk Board, the U.S. Congress’s International Financial Institution Advisory Commission, the Shadow Financial Regulatory Committee, and the Federal Reserve System’s Centennial Advisory Committee. He serves as co-managing editor of the Journal of Financial Intermediation. He received a B.A. in economics from Yale University, Magna Cum Laude, a Ph.D. in economics from Stanford University. Professor Calomiris holds an honorary doctorate from the University of Basel.