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Media Attention Shifts and Market Volatility: Implications for Global Equity and Currency Returns

Abstract

Global financial markets have become increasingly interconnected over

time—both in terms of information flows and capital flows.

Understanding the determinants of these patterns is key as they have

important implications for investment decisions—and ultimately, the

efficiency of capital allocation.

This study aims to analyze the correlative relationships between global

markets by drawing insights from digital media and measuring their

impact on market volatility and returns. First, we propose a new general

framework through which to measure contagion propagation

mechanisms by analyzing the level of media focus. Second, we present

evidence that the level of media focus can be anticipatory of high-

volatility periods and provides valuable insights for asset allocators

during uncertain times. More specifically, high media focus tends to

precede VIX declines of 21.3% annualized, whereas low media focus is

shown to be a harbinger of VIX spikes of 68.4% annualized. Our

framework is also effective at timing global equity markets, with the

MSCI ACWI benchmark posting annualized returns of 13.3% when

media focus was high or moderate over the past six years, and losing

12.3% when media coverage turned indiscriminate—equivalent to an

annualized spread of 25.6%.

In Practice Series

State Street Associates’ research

agenda is rooted in financial theory

yet recognizes that theory must bend

to real-world complexities. Our In

Practice series provides investment

practitioners with concrete insights

into how our indicators and tools can

be applied.

State Street Associates

State Street’s research partnership

with renowned academics, State

Street Associates, offers a full

spectrum of indicators and advisory

research services.

MKT MediaStats

MKT MediaStats LLC is a pioneer in

extracting financial markets insights

from large sets of unstructured data.

Through our partnership with MKT

MediaStats, State Street offers a full

spectrum of media-based indicators

for companies, global equity indices

and foreign exchange.

Jana Minn November 2019 State Street Associates

In Practice

This paper is not intended for trading purposes. The paper is not appropriate for the purposes of making a decision to carry out a transaction or trade. Nor does it provide any form of advice

(investment, tax, legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments or products. State Street MediaStats may

discontinue or change the paper content at any time, without notice. State Street MediaStats does not guarantee or warrant the accuracy, completeness or timeliness of the paper. For more

detailed disclaimer, please refer to the Disclaimers and Important Risk Information in back cover of this document.

IN PRACTICE: MEDIA ATTENTION SHIFTS AND MARKET VOLATILITY

Information Classification: General

STATE STREET CORPORATION | 2830406.1.1.GBL 2

Contents

Introduction p. 3

The Media-Based Macro Linkages Indicators p. 4

SCAR and Media Focus p. 4

Media Focus and Contagion p. 5

Media ADHD and VIX: An Uncanny Relationship p. 5

Media Focus and Foreign Exchange p. 7

Media Focus and Country Returns p. 9

Media Focus: Implications for Asset Allocation p. 10

Conclusions p. 13

References p. 14




Our In Practice series provides practitioners with concrete insights into how they can incorporate State Street

MediaStats indicators and tools into their investment process. In this issue, we introduce a framework for

incorporating macro media linkages in assessing the current market environment and minimizing drawdowns.

1. Introduction

Global financial markets have become increasingly interconnected over time—both in terms of information flows

and capital flows. Coincidentally, there is mounting empirical evidence that return correlations among markets

are also rising, and strong spillover effects from one market to another have been documented. It is widely

understood in the investment community that high asset correlations tend to suggest the presence of a common

source of risk which may cause widespread contagion, spilling into all asset classes and global economies.

Understanding the determinants of these patterns is key as they have important implications for investment

decisions—and ultimately, the efficiency of capital allocation.

However, this approach makes it challenging to manage risk because the relationship between asset returns in

some future periods is essentially unknown. While global market correlations may not directly explain why a

major contagion event occurred, it is very useful to better understand the complexities of today’s highly integrated

financial markets. This study aims to analyze the correlative relationships between global markets by drawing

insights from digital media and measuring their impact on market volatility and returns.

Our proprietary State Street MediaStats Macro Linkages indicators comb through tens of thousands of articles

each day to capture macroeconomic links between currencies and global equity markets. To measure the

strength of the macroeconomic link between two currencies (countries), our algorithm counts the number of times

they are co-mentioned in the media. We assume that the larger the number of news items that co-mention two

currencies (countries), the stronger the macroeconomic link—or interconnectedness—between them in a given

period. Trends in interconnectedness can be a powerful predictor of future volatility and risk in global markets,

and as investors continue to grapple with short-term uncertainty, we believe our macro linkages indicators can

provide valuable insights into asset allocation.

Data Overview

Media articles are gathered daily through various channels from tens of thousands of sources for a universe of

44 global equity markets and 34 foreign currencies. The set of media sources is diverse and includes

publications classified into General, Local General, Local Business, News Services, Industry, International,

Business or Investing, Corporate Communications (PR), and other categories.

To ensure that we obtain macro linkages from news items centering on specific securities rather than many

securities which devalues information—say, an all-inclusive country or currency overview—we limit our links to

those formed in articles that mention at most four currencies (countries). This approach ensures the quality of

information we obtain about the particular securities in our coverage.




2. The Media-Based Macro Linkages Indicators

In addition to our linkages offerings for US large caps and US sector groupings, State Street MediaStats also

generates Linkages Connection for currencies and global equity markets. The Linkages Connection indicators

show the cohort—or the network of economically-related currencies (countries)—for each of the 34 currencies

and 44 foreign countries in our coverage. More specifically, for each currency or country (aka, centroid) we offer

a daily snapshot of all securities co-mentioned with it in the media, along with a measure of their relevance,

expressed as a percentage weight. We also track the proportion of articles that discuss only the centroid—and

not any other securities. Furthermore, on any given trade date, the weights of all securities co-mentioned with a

given centroid—as well as that of articles only mentioning the centroid—sum to 100%.

The Linkages Connection weight of each security in a given centroid’s cohort is defined as follows. Let j

represent a currency (country) in our coverage universe. Let Ωj,t represent the universe of related securities that

are co-mentioned with j in month t, and define Ni,j,t as the number of news articles that co‐mention securities i and

j during that month, where i ∈ Ωj,t. For each security i in Ωj,t, we calculate its weight in the cohort, wi,j,t, as:

where

3. SCAR and Media Focus

This section begins with an example of macro linkages for the US Dollar centroid. Figure 1 displays all currencies

in the USD’s network as of two distinct dates, August 31, 2015 (Panel A) and December 31, 2018 (Panel B). To

minimize noise, we exclude any connected currencies with linkages weights below 50 bps in the network.

Figure 1: An Illustration: USD’s Linkages Network

Source: State Street Global Markets®, MKT MediaStats. Data for illustrative purposes only.

It is evident from Figure 1 that the USD was co-mentioned with twice the number of currencies in August 2015,

compared to December 2018 (20 vs. 10, respectively). Additionally, among all articles that discussed the USD, a

https://globalmarkets.statestreet.com/research/service/v2/resource/pdf/6cfb8a32-f3c2-4ebb-9a7d-6188c6a9ef7f




proportion of 65% covered only the USD—and not any additional currencies—in August 2015, compared to a

proportion of 86% in December 2018.

Based on these macro networks, we develop a variable that measures the level of digital media focus.

Specifically, we develop SCAR—the Single Currency (country) Article Ratio, or the proportion of articles

discussing only the centroid and not any other securities—as a proxy for media focus. In the above example, the

USD’s SCAR was 65% in August 2015, and 86% in December 2018. In other words, media exhibited a

considerably lower focus in the first period illustrated, choosing to discuss the USD along with many other

currencies, which resulted in a lower SCAR for the USD.

4. Media Focus and Contagion

Many papers have explored the topic of contagion, testing for its presence with statistical methods. Their

approaches may differ with respect to the definition of contagion chosen as a starting point. To assess contagion,

some compare the correlation between two equity markets during a stable period to that during a period of

turmoil. Others support the notion that “rational” investor behavior that transmits shocks through financial markets

is not contagion, but “irrational” behavior is. Still others suggest that shocks propagating from one country to

another that is economically similar or closely linked through trade or capital flows may not necessarily constitute

contagion. We favor the definition adopted by Forbes and Rigobon (2000), which suggests contagion should be

interpreted as the change in the transmission mechanisms that takes place during a shock period. Thus, if two

markets are traditionally highly correlated and continue to be highly correlated after a shock, this may not

necessarily constitute contagion. Based on this approach, contagion needs to entail cross-market linkages—

whether by trade, financial institutions, portfolio flows, or reassessment of macroeconomic fundamentals—that

are dramatically different after a shock is observed.

In this paper, we study a new channel of contagion based on the State Street MediaStats Macro Linkages

indicators. We argue that when media coverage is focused (e.g., SCAR is high), markets are defined by a

greater proportion of idiosyncratic volatility, whereas when media coverage is indiscriminate and extends to many

securities at a time (e.g., SCAR is low), markets are driven by systematic volatility instead. Is there a leading

relationship between media focus and volatility? And if so, what insights can we glean for asset allocation? We

set out to address these questions in the remainder of this study.

5. Media ADHD and VIX: An Uncanny Relationship

Recent studies suggest a link between digital media use and symptoms of ADHD1. We are more interested,

however, in evaluating a different phenomenon—whether digital media’s ADHD can help us anticipate market

tantrums. To that end, we consider the USD SCAR—e.g., the proportion of all media articles discussing the USD

that do not mention any other currencies—given the bellwether status of the greenback in periods of turmoil. For

1https://www.cnn.com/2018/07/17/health/adhd-symptoms-digital-media-study/index.html

https://www.cnn.com/2018/07/17/health/adhd-symptoms-digital-media-study/index.html




the purposes of this analysis, each day we calculate the three-month percentile rank of the USD SCAR, with

lower percentile ranks signaling high media focus and higher percentile ranks signaling indiscriminate media

discourse across currencies—or media in a state of ADHD, to extend the analogy above.

We incorporate a one-day lag to account for the publication lag with which our data are computed. VIX changes

over the one month following each media focus observation are shown in Figure 2.

Figure 2: Declining Media Focus a Leading Indicators for VIX Changes and Dispersion

Source: State Street Global Markets®, MKT MediaStats, DataStream (May 2013 – Jun 2019).

Analyzing further the relationship between media focus and subsequent VIX changes in Figure 3, it is evident

that media has predictive power. Indeed, high media focus tends to lead declines in VIX over the subsequent

month, while low media focus tends to be a harbinger of spikes in VIX over the subsequent month. More

specifically, high media focus (top quartile) tends to precede VIX declines of 21.3% annualized, whereas low

media focus (bottom quartile) is shown to precede VIX spikes of 68.4% annualized.




Figure 3: One-Month Forward VIX Changes and Levels by Media Focus Quartiles


6. Media Focus and Foreign Exchange

Moving from theory to practice, we investigate our hypothesis that media focus can help investors avoid periods

of marked drawdowns by studying the performance of G10 currencies, as well as emerging market (EM) FX.

Using media focus as proxied by the three-month percentile rank of the USD SCAR, we define risk-on periods as

those in which media focus lies in the top three quartiles (high and moderate media focus) and risk-off periods as

those in which media focus is in the bottom quartile (low media focus). We apply a one-day publication lag to

avoid a look-ahead bias and measure currency performance over the following month, following regime

identification. In Figure 4 below, the CHF, JPY and USD stand out as the safe havens—the currencies that tend

to appreciate during times of uncertainty and market instability.

Figure 4: Media Focus and G10 Currency Returns

Source: State Street Global Markets®, MKT MediaStats, WM/Reuters, DataStream (May 2013 – Jun 2019). One-month forward rates

against the USD used (demeaned). USD results reflect performance of the DXY index.




Additional performance statistics for these three currencies are listed in Figure 5. The return spreads generated

in the two risk environments are large and economically significant. They are also consistent with our intuition

that periods of low media focus suggest the presence of market contagion and precede a generalized flight to

safety.

Figure 5: Media Focus and the Flight to Safety

CHF JPY USD

Statistics Risk-On Risk-Off Risk-On Risk-Off Risk-On Risk-Off

Return (Ann) -0.1% 13.0% -1.3% 14.4% 1.2% 8.2%

Volatility (Ann) 4.5% 9.8% 7.9% 7.4% 6.0% 6.6%

Sharpe Ratio 0.0 1.3 -0.2 2.0 0.2 1.2

Source: State Street Global Markets®, MKT MediaStats, WM/Reuters, DataStream (May 2013 – Jun 2019). One-month forward rates used.

Next, we explore the efficacy of media focus in differentiating risk regimes for emerging market FX. We use the

J.P. Morgan ELMI+ index as a proxy for EM FX. The ELMI+ tracks the performance of local-currency

denominated money market instruments in emerging market countries, using foreign exchange forwards.

Applying the simple media focus rule described above, we identify risk-on and risk-off months in our sample. The

annualized performance of the ELMI+ in these two regimes—as well as for the entire history—is shown in Figure

6.

Figure 6: Performance of JPM ELMI+ Conditioned on Media Focus

Statistics Risk-On Risk-Off All Periods

Return (Ann) 1.3% -6.5% -0.6%

Volatility (Ann) 6.1% 5.4% 6.1%

Sharpe Ratio 0.22 -1.19 -0.11


Figure 7 illustrates the risk-off periods for the ELMI+, as anticipated by our measure of media focus. Periods

colored in light blue represent those months when media focus was extremely low, whereas the gaps represent

months of high or moderate media focus.




Figure 7: Media Focus Capturing Drawdowns


7. Media Focus and Country Returns

To examine the consistency of our findings, we extend the risk regime framework to global equity markets and

study their performance, conditional on media focus towards the US equity markets. For each of the 44 countries

in our country equity media linkages dataset, we use the three-month percentile rank of US equity market SCAR

to demarcate history into risk-on and risk-off months. Again, we define risk-on periods as those in which media

focus lies in the top three quartiles (high and moderate media focus) and risk-off periods as those in which media

focus is in the bottom quartile (low media focus). We then measure average country returns and volatility

(annualized) for each country in each of the two market environments—risk-on or risk-off—to calculate the

Sharpe ratios presented in Figure 8 below.

Figure 8: Media Focus and Country Returns Using US Equity SCAR


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Risk Off JPM ELMI+




Our results suggest that our framework delivers promising results in identifying risk regimes, with 86% of

countries in our coverage generating risk-on Sharpe ratios in excess of their counterpart risk-off Sharpe ratios.

Accounting for the bellwether status of the greenback as a risk measure, we explore the efficacy of the USD

SCAR in demarcating risk regimes in global equity markets. For consistency with the analysis presented above,

we define risk-on periods as those in which media focus lies in the top three quartiles (high and moderate media

focus) and risk-off periods as those in which media focus is in the bottom quartile (low media focus). In Figure 9

below, we showcase country performance in each of the two risk environments—risk-on and risk-off—identified

by the USD SCAR.

Figure 9: Media Focus and Country Returns Using USD SCAR


Tallying the success rates again, we note that the USD serves as a more robust gauge of risk, with 98% of

countries in our coverage now posting risk-on Sharpe ratios in excess of their risk-off counterpart Sharpe ratios.

In other words, media focus appears to differentiate local market environments and anticipate potential

drawdowns reasonably well.

8. Media Focus: Implications for Asset Allocation

In this section, we explore an asset allocation implementation of media focus. A traditional 60/40 portfolio would

allocate 60% to equities and 40% to bonds. The objective of the 40% allocation to bonds is to provide yield and

simultaneously ensure downside protection if equities experience a drawdown. In today’s extraordinary low-yield

environment, however, many investors have rightly raised the question: can my bond portfolio provide adequate

downside protection? Is there another way to provide equity downside protection? We set out to address that

question here.

Leveraging insights from both the country equity and foreign exchange corpora of news articles, we combine the




USD SCAR and the US equity SCAR, equally-weighted, and study their combined impact on an ACWI strategy,

using the All Country World Total Return (MSCI ACWI) index as a proxy for global equities. As previously

detailed, we define risk-on periods as those in which media focus lies in the top three quartiles (high and

moderate media focus) and risk-off periods as those in which media focus is in the bottom quartile (low media

focus). Our hypothetical portfolio is then invested fully in global equities when media focus is high or moderate,

and moves to 100% bonds—proxied by the FTSE World Government Bond (WGBI) index—when media signals

possible contagion and “risk-off”. We apply a one-day publication lag to avoid a look-ahead bias and hold the

position over the ensuing month, rebalancing the portfolio monthly. Figure 10 below shows the cumulative

returns of our strategy in dark blue, compared to ACWI, bonds, the 60/40, as well as an ex-post benchmark.

Figure 10: Leveraging Media Focus to Market Time Global Equities


Using the simple media focus rule described above, the ACWI strategy is 100% invested in equities about 80%

of the time. In other words, it takes higher risk than the average 60/40 when contagion risk is low, but the other

20% of the time, it takes virtually no risk, fully allocated in bonds. Which would be a superior way to manage

downside risk:

• 60/40: Hold 40% in low-return fixed income all the time, or

• ACWI + media focus: Hold fixed income only when contagion risk increases, as perceived from the

collective media narrative from across the globe?

Standard practice entails maintaining the same portfolio risk profile regardless of market conditions. However,

the reward for taking investment risk varies greatly over time. Hence it may be worthwhile to reduce risk as signs

emerge that we are headed into a contagion-driven market environment, with higher systematic volatility. We

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ACWI timed with Media Focus ACWI Ex-Post Benchmark 60/40 Benchmark FTSE WGBI




present performance statistics of the ACWI portfolio timed with media focus, compared against the ACWI, FTSE

WGBI, the 60/40 portfolio and the ex-post portfolio.

Figure 11: Global Equities Market Timing Statistics

Statistics Media Focus Timed ACWI FTSE WGBI Ex-Post

Benchmark 60/40

Return (Ann) 11.3% 7.6% 1.3% 6.5% 5.2% t-stat 2.96 1.7 0.67 1.76 1.80

Volatility (Ann) 9.4% 11.7% 5.2% 9.5% 7.4%

Sharpe Ratio 1.21 0.65 0.24 0.68 0.71

Max Drawdown 8.2% 13.7% 9.4% 11.5% 9.1% Hit Rate* 67%

Source: State Street Global Markets®, MKT MediaStats, DataStream (May 2013 – Jun 2019). * Hit rate calculated relative to the ex-post

benchmark.

Reducing exposure in periods of possible contagion and minimizing drawdowns can indeed be beneficial for

performance. Figure 11 indicates that a strategy conditioned on media focus results in a significantly higher

Sharpe ratio (1.21, compared to 0.65 for ACWI alone and 0.71 for a traditional 60/40 allocation), a reduction in

volatility and a more limited drawdown.

Next, in Figure 12, we show the average annualized return of the ACWI for the months preceded by high or

moderate media focus (“risk-on”), as well as for the periods preceded by indiscriminate media coverage (thus

signaling a “risk-off” environment). Our model appears to do a decent job timing global equity markets, with the

MSCI ACWI benchmark posting annualized returns of 13.3% after media focus was high or moderate, and losing

12.3% when media coverage turned indiscriminate—equivalent to an annualized spread of 25.6%.

Figure 12: Performance of MSCI ACWI Conditioned on Media Focus

Statistics Risk-On Risk-Off

Return (Ann) 13.3% -12.3% Volatility (Ann) 10.1% 15.3%

Sharpe Ratio 1.32 -0.80





Lastly, Figure 13 illustrates the periods of outsized drawdowns in MSCI ACWI, as anticipated by our combined

measure of media focus. Periods colored in light blue represents those months when media focus was extremely

low, whereas the gaps represents periods preceded by high or moderate media focus.

Figure 13: Media Focus Capturing Drawdowns


9. Conclusions

Today, digital media has a significant impact on market participants and the ways in which they choose to

evaluate potential investments. Although the sheer volume of information accessible online must be intelligently

filtered in order to minimize noise and provide actionable insights, there can be little doubt that digital media

holds significant value to investors looking to maximize alpha and minimize drawdowns.

This study empirically examines whether media can be helpful in anticipating periods of turmoil in global equity

and currency markets. We propose a new general framework through which to measure propagation

mechanisms by leveraging macroeconomic linkages between currencies and countries derived from media co-

mentions. Our results suggest that dynamic networks—defined by digital media—play an important role in asset

pricing. We also present evidence that the level of media focus can be anticipatory of high-volatility periods and

provides valuable insights for asset allocators during uncertain times. A firmer grasp of media attention shifts

enables the construction of lower-risk portfolios and better protection on the downside, while capturing most of

the upside. Thus, it might be worthwhile for investors to incorporate digital media into the portfolio management

process when evaluating the prospects of global equities and currencies.




References

Forbes, Kristin J. and Roberto Rigobon. "No Contagion, Only Interdependence: Measuring Stock Market

Comovements," Journal of Finance, 2002, v57(5,Oct), 2223-2261.

Forbes, Kristin. “The Big C: Identifying Contagion,” NBER Working Paper No. 18465 (Oct 2002).

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SSA 2019-08

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