Title: Emotions in macroeconomic news and their impact on the European bond market
Authors: Luca Tiozzo Pezzoli - JRC European Commission (Italy) [presenting]
Sergio Consoli - National Research Council of Italy (CNR) (Italy)
Elisa Tosetti - JRC European Commission (Italy)
Abstract: The aim is to study how emotions extracted from macroeconomic news can be used to explain and forecast future behaviour of sovereign bond yield spreads in Italy and Spain in the period from 2 March 2015 to 31 December 2018. We use a big, open-source, news-level database known as Global Database of Events, Language and Tone to construct a set of variables capturing daily variations in the emotional content of news about national and foreign economic events and use them as a proxy for market investor's expectations and behaviour. We focus on a set of negative emotions, conveying varying intensities of fear and anxiety, and linked to the different affective states of investors. We find that negative emotions such as anxiety and panic extracted from news are good predictors for the increase in sovereign bond yield spread for the two countries. Relatively stronger emotions, such as panic, reveal useful information for forecasting one-day ahead and five-day ahead changes in spread. Finally, we find that negative emotions generated by the Italian political turmoil in the period June-December 2018 propagated to the Spanish news, affecting the Spanish sovereign bond yield spread.