When cable news drives market volatility
The US Presidential election is heating up and that means there are more discussions about economic policies in the media (among other things…). One party makes a case for stability and continuity, while the other party argues for the need for change. Historically, political discussions have not influenced financial markets, but an analysis of US cable news indicates that this is changing.
Using AI, the researchers analysed the three major cable news networks in the US (CNN, Fox News, and MSNBC). They identified when politicians are interviewed on air and what they are talking about. Then they focused on the interviews that discussed economic policy and checked how equity markets reacted while the interview was broadcast and in the immediate aftermath.
The chart shows the minutes per day economic policy is discussed on the three channels between 2010 and 2023. Note that this only counts discussions with a politician on TV, not discussions between hosts of TV shows or retired politicians and other pundits, which explains why the numbers are so low (obviously, the channels talk much more than 10 minutes a day about economic policy).
The overall tendency is for economic policy discussions to pick up in election years, particularly on Fox News which overall features slightly more economic policy discussions than CNN or MSNBC. The increase in economic policy discussions was particularly pronounced in 2010 during Obama’s efforts to pass the Affordable Care Act, as well as in 2020 when Biden and Trump ran for the Presidency. 2022 saw an increase in economic policy discussions on Fox News but not in the other channels.
Minutes per day of economic policy discussion on cable news
Source: Bergbrant and Bradley (2024)
When economic policy is discussed on cable news, equity market volatility increases. An increase in the length of economic policy discussions with politicians by 5 minutes increases the VIX volatility index by 5 points. When politicians are on cable news discussing other topics, no such spike in market volatility is observed and if economic policy is discussed more in print media, volatility tends to go down slightly. In other words, cable news filters through to increased market volatility almost immediately and is more influential than traditional media.
All of this seems to be driven by retail investors because professionals rarely watch cable news while on the job. They may watch Bloomberg News or CNBC, but not MSNBC or Fox News.
That retail investors may be at fault for driving this market volatility can also be seen by zooming in on the pandemic. On days and months with lockdowns, more retail investors were trading in the stock exchange than normal and coverage of economic policies by cable news created larger spikes in market volatility, which, in my view, once again shows that the rise of retail traders has all kinds of negative consequences and make markets noisier and less efficient.
Would one not expect there to be more discussion of economic policy at times when markets are more volatile? How do the authors know causality isn’t flowing in the other direction? It seems more plausible to me that at times of economic volatility there is also likely to be both more market volatility and more discussion of economic policy on cable news. So how do the authors control for that?