One of the defining features of the coronavirus pandemic has been the incredible impact its had on the world’s stock markets.  As governments have attempted to limit the spread of the virus by locking down vast chunks of the economy, global stock markets have plunged downwards, with single day slumps matching that of the entire financial crisis of 2008.

Much of this slump has been driven by fears that the resulting economic downturn could last for years, with many economists predicting a fall in GDP of at least 10%.  New research from Columbia Business School explores the role the media has played in this downward spiral.

Non-stop news

Another overwhelming feature of the pandemic has been the wall-to-wall coverage its received.  It’s been difficult to find any other topic being discussed for a few weeks now, and the paper argues that this barrage of news coverage may in itself be driving markets lower.

The researchers believe that the violent swings the stock market is witnessing are a direct consequence of the breathless coverage of the crisis, which is resulting in hyper-reactions in the market.

The hypothesis is supported by natural language processing-based analysis of all Reuters coverage of the virus.  The analysis attempted to link the tone of the coverage with the changes in stock market indices.

Negative framing

The model looks at whether positive or negative framing of the pandemic coincide with fluctuations in the market.  The analysis reveals a strong correlation between the sentiment of the news coverage and the market price, which the authors believe is an indicator of the responsiveness of the market to news about the virus.

They suggest there are key links between the reaction of the market and the news coverage of the virus, and vice versa.  Nonetheless, the authors believe the markets are remarkably prescient about the future incidence of coronavirus cases.

It’s a finding that the researchers believe may prompt us to rethink how we view the relationship between news coverage and the financial markets, as it seems possible to create a vicious feedback loop that feeds off of the volatility of each other.