The Wiley Finance Series : Handbook of News Analytics in Finance

stable during the whole period although fluctuations are quite noisy around the mean.

We clearly observe, however, that the number of investors correlate strongly with

volatility (Figure 11.6). This means that when markets become very volatile, the number

of investors who participate increases. Although increased volatility can have a self-

feeding effect that forces more investors to enter the market, we can assume that new

important information represents one of the most significant causes of such behavior.

Situations of higher volatility force market participants at market sidelines to enter

the market. The more developed a market,the more investors might be at the sidelines at

any given time. We would also expect to see a higher proportion of the number of

individual investors in more developed markets. As bad news tends to receive more

media attention, this is amplified especially in down-market conditions when investors

start rushing in to liquidate their positions.

11.4 Conclusions

Why is volatility higher in down markets? We proposed in this chapter a model that

explains this asymmetry starting from the observation that news tends to be asymmetric

as well (compare Figure 11.7): the media report predominantly bad news, as our analysis

showed. The effect should be stronger, where analyst coverage and media reports are

more frequent, and this can be observed in international data on volatility asymmetry.

A large number of bad news items then leads to overreaction of (predominantly)

private investors increasing volatility, thus a larger proportion of private and on average

less sophisticated investors on the market increases volatility asymmetry as well. Also

this effect can be found in international data on volatility asymmetry, where mostly

countries with large numbers of private investors score high. Countries that have large

numbers of private investors and sophisticated financial markets with good analyst

268 News and risk

Figure 11.6.Correlation between volatility and investor market participation for the Estonian
stock market.