The Handbook of News Analytics in Finance

13.4 COMPUTATIONAL EXPERIMENTS

Two separate computational studies were undertaken. The first covers the period in January 2008 when equity markets were starting to decline (component stocks of the EURO STOXX 50 index are considered). The second study covers a period in September 2008 when the global economy was beginning to move into recession (component stocks of the Dow Jones 30 are considered).

13.4.1 Study I

The first study covers the period January 17, 2008 to January 23, 2008 when sentiment worsened and option-implied volatility measures surged. Over this period worldwide stock markets fell significantly. Since 2003 equity markets had been growing steadily, but at the end of 2007 they started to decline and sentiment started to fall. Over January 2008 market sentiment worsened further. This was driven by a few key events. In the US, George Bush announced a stimulus plan for the economy and the Fed cut interest rates by 75 basis points, the largest cut since October 1984. In Europe, Societe Generale was hit by the fraud scandal of alleged rogue trader Jerome Kerviel. In Asia, stock markets also fell in this period.

We consider a portfolio of financial stocks weighted by their market capitalizations. The portfolio constituents and weights are shown in Table 13.1. Table 13.2 shows the volatility values for this portfolio. The second column shows the values predicted by the “basic” factor model, the third the values from the model updated using only option-implied volatility ...