We find that an increase in the "unusualness" of news with negative sentiment predicts an increase in stock market volatility. Our analysis is based on over 360,000 articles on 50 large financial companies, mostly banks and insurers, published in 1996--2014. We find that the interaction between measures of unusualness and sentiment forecasts volatility at both the company-specific and aggregate level. These effects persist for several months. The pattern of response of volatility in our aggregate analysis is consistent with a model of rational inattention among investors.
Biography
Harry Mamaysky is the head of research and a founding partner at Osprey Bay Capital Management LLC. He is a visiting research scholar and adjunct professor at Columbia Business School. He was formerly head of the Systemic Risk Group at Citigroup, and a member of the firm's Risk Executive Committee. Previous to that, he was senior portfolio manager in Citi Principal Strategies, where he co-managed the relative value credit book. Before joining Citigroup, he held positions with Old Lane, Morgan Stanley, and Citicorp. He was also an assistant professor of finance at the Yale School of Management during the period 2000–02.
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