Daily Judgement: Political News and Financial Markets

Wednesday, July 12, 2017
Gilbert Scott Building - Room 356 (University of Glasgow)
Michael Breen , Dublin City University
Iain McMenamin , Law and Government, Dublin City University
Michael Courtney , Law and Government, Dublin City University
Gemma McNulty , Law and Government, Dublin City University
Political economists disagree about the extent to which markets monitor politics in advanced economies. One school asserts that investors are interested in a handful of macroeconomic indicators, while another says that markets also watch political competition closely. We argue that, according to the Efficient Markets Hypothesis, market participants should pay attention to daily news relevant to asset prices and that this relationship should be dynamic. Using a new automatic classifier, we code the content of every Financial Times paragraph about the UK from 1986 to 2012. We then test the impact of news on government debt. We find that volatility in political news is correlated with volatility in bond prices. Contrary to the macroeconomic school, volatility in macroeconomic policy news is not associated with market volatility. Our results suggest that the market passes daily judgement on politics, not merely cleaving to seldom-released official statistics.