Is It Worth Reading Financial News?

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months. It is visible in industrial production, employment, real income, and other measures of economic activity. A recession generally occurs when there is a widespread drop in spending (an adverse demand shock). This may be caused by an external event such as a financial crisis, an increase in interest rates, a period of high oil prices, or a natural disaster. Alternatively, it may be caused by a more internal event such as a burst of technological innovation or a central bank raising interest rates to slow an overheating economy.

There exist indicators that can be used to aid in predicting a recession. A common one is the yield curve, which is a graph of the yields on bonds of different maturities. An inverted yield curve (where short-term yields are higher than long-term yields) is often seen as a predictor of a recession.

Reference [1] proposed a novel, so-called media recession indicator (MRI) to predict a recession. Basically, the authors measured the frequency with which the word “recession” appeared in financial and economic newspapers and used it as a sentiment indicator to predict a recession. They found out,

… The indicators are based on articles in the Financial Times and the Wall Street Journal, and use different ways of weighting articles that include the key word “recession.” The constructed indicators outperform predictor variables that are well established in the literature. We view this textual-based analysis as complementary to more traditional approaches in predicting business cycles and the stock market. We believe our findings can be useful for central banks and investors interested in business cycles and investment management.

In short, the proposed media recession indicator has predictive power and an investment strategy based on it outperformed Buy and Hold.

Using their research results, the authors concluded that there is value in reading financial news. We note, however, that in order to be able to extract alpha from financial news, one has to use advanced analytical techniques such as natural language processing. This technique is not available to regular investors.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Baz, Salim and Cathcart, Lara and Michaelides, Alexander, What is the Value of Financial News? (2022). https://ssrn.com/abstract=4251414

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSDow Jones Futures Fall In Dangerous Market; Watch Tesla, AMD
Dow Jones Futures Fall In Dangerous Market; Watch Tesla, AMD
Stay up-to-date with the latest news - click here
LATEST NEWSGold prices flat as steady dollar counters economic risks
Gold prices flat as steady dollar counters economic risks

Gold prices were flat on Monday as a steady U.S. dollar countered support from wider economic risks and expectations that the Federal Reserve would pause its interest rate-hike cycle. FUNDAMENTALS * Spot gold was listless at $2,011.04 per ounce by 0049 GMT. U.S. gold futures…

Stay up-to-date with the latest news - click here
LATEST NEWSOneok to buy Magellan Midstream in $19bn US pipeline deal
Oneok to buy Magellan Midstream in $19bn US pipeline deal

Cash-rich oil and gas companies seek acquisitions after lengthy dry spell

Stay up-to-date with the latest news - click here
LATEST NEWSThe World's Biggest Gold Miner Bets Big on Copper
The World's Biggest Gold Miner Bets Big on Copper

Newmont’s $17.5 billion recommended takeover of Australia’s Newcrest boosts its exposure to a key metal in the energy transition.

Stay up-to-date with the latest news - click here
LATEST NEWSThe World’s Biggest Gold Miner Bets Big on Copper
The World’s Biggest Gold Miner Bets Big on Copper
Stay up-to-date with the latest news - click here

Leave a Reply