How News and Mood Affect the Markets
The old adage "no news is good news" seems to relate well to the stock market. And investor moods plays a big role in market swings.
Market volatility can be very different at different times. For example, the announcement of rising unemployment is good news for stocks during periods of economic expansion and bad news during economic decline.
A rise in unemployment tends to signal a decline in interest rates--good for stock prices-- and yet a decline in future corporate earnings--bad for stock prices. The combination of these two effects and the result in stock prices varies depending on the state of the economy.
Pietro Veronesi, University of Chicago, showed that investors rationally anticipate that during periods of high uncertainty their expectations of future cash flows tend to react more swiftly to news. This predictable higher sensitivity to news tends to increase the asset price volatility, against which risk-averse investors are willing to hedge. His research shows that "in equilibrium, investors' willingness to hedge against changes in their own "uncertainty" on the true state makes stock prices overreact to bad news in good times and underreact to good news in bad times."
Good News in Bad Times Ignored?
The main result is that when times are good, a bad piece of news leads to greater price reductions in investments greater than the reduction in expected future dividends.
Bad News in Good Times Overreacted?
Conversely, a good piece of news in bad times tends to increase the expected future dividends, but also increases the discount investors require to hold the asset, such that the increase in price is lower than the increase in expected future dividends.
As well, the degree of investor reactions to news tends to be high in good times and low in bad or uncertain times. Volatility as a response to news in bad times is also much higher than volatility in good times.
Some Funny Cartoons:
Twitter Predicts Market Swings!
Twitterverse mood predicts stock market moves. In a study from the University of Indiana, it was found that the overall mood of Twitter users could be used to predict market swings.
By creating search queries for popular phrases using keywords such as "happy", "sad", "fearful" or optimistic, a daily "Twitterverse Mood Score" could be compiled which correlated with the direction of market expansion or contraction.
Shifts in Twitterverse moods scores predict market shifts by nearly 90% accuracy.
So What Does Mood and News Mean for Private Investors Like Us?
1. No news is likely good news.
2. Investor mood seems to play a major role in driving markets on any given day.
3. Bad news in good times tends to lead to greater reactions from investors.
4. Good news in bad times does not necessarily lead to increase in stock prices.
5. Twitter can be used a social barometer and therefore predict market moves. 6. Maybe I should get out of the market and put my money in a savings account. (just kidding!)
Happy Investing!
Some funny cartoons
The old adage "no news is good news" seems to relate well to the stock market. And investor moods plays a big role in market swings.
Market volatility can be very different at different times. For example, the announcement of rising unemployment is good news for stocks during periods of economic expansion and bad news during economic decline.
A rise in unemployment tends to signal a decline in interest rates--good for stock prices-- and yet a decline in future corporate earnings--bad for stock prices. The combination of these two effects and the result in stock prices varies depending on the state of the economy.
Pietro Veronesi, University of Chicago, showed that investors rationally anticipate that during periods of high uncertainty their expectations of future cash flows tend to react more swiftly to news. This predictable higher sensitivity to news tends to increase the asset price volatility, against which risk-averse investors are willing to hedge. His research shows that "in equilibrium, investors' willingness to hedge against changes in their own "uncertainty" on the true state makes stock prices overreact to bad news in good times and underreact to good news in bad times."
Good News in Bad Times Ignored?
The main result is that when times are good, a bad piece of news leads to greater price reductions in investments greater than the reduction in expected future dividends.
Bad News in Good Times Overreacted?
Conversely, a good piece of news in bad times tends to increase the expected future dividends, but also increases the discount investors require to hold the asset, such that the increase in price is lower than the increase in expected future dividends.
As well, the degree of investor reactions to news tends to be high in good times and low in bad or uncertain times. Volatility as a response to news in bad times is also much higher than volatility in good times.
Some Funny Cartoons:
Twitter Predicts Market Swings!
Twitterverse mood predicts stock market moves. In a study from the University of Indiana, it was found that the overall mood of Twitter users could be used to predict market swings.
By creating search queries for popular phrases using keywords such as "happy", "sad", "fearful" or optimistic, a daily "Twitterverse Mood Score" could be compiled which correlated with the direction of market expansion or contraction.
Shifts in Twitterverse moods scores predict market shifts by nearly 90% accuracy.
So What Does Mood and News Mean for Private Investors Like Us?
1. No news is likely good news.
2. Investor mood seems to play a major role in driving markets on any given day.
3. Bad news in good times tends to lead to greater reactions from investors.
4. Good news in bad times does not necessarily lead to increase in stock prices.
5. Twitter can be used a social barometer and therefore predict market moves. 6. Maybe I should get out of the market and put my money in a savings account. (just kidding!)
Happy Investing!
Some funny cartoons
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