Fake news has a profound impact on many areas of life today, and recent research from the University of Canterbury shows that the financial markets are not immune either.  The researchers examined the puzzling relationship between economic policy uncertainty and the Volatility Index (VIX), which is a gauge of the fear felt throughout the stock market.

“We observed a puzzling phenomenon following the election of Donald J. Trump in the United States and the Brexit referendum in the United Kingdom. Certain well-established financial relationships did not hold anymore. Traditionally economic policy uncertainty and a benchmark of fear of the market, known as the Volatility Index (VIX) have a very strong positive relationship, but we saw these move apart,” the researchers explain.

“We find evidence for existing theory that claims that the relationship might be affected by the quality of political signals. Political signals show strength in the information of what politicians say and in their actions. So certainty around: if they say A at the start of the week, they won’t say B at the end of the week.”

Measuring political misinformation

The researchers develop a tool, called a Qindex, which aims to measure the quality of political signals and information to better understand the impact of these signals on the financial markets.

“In our paper we show if the quality of political signal is low it breaks some of the well-established relationships in a financial market,” they explain. “In order to achieve it, we have come up with a benchmark for the UK and US which tells us what the quality of the political signal is at a given moment.”

The Qindex is currently designed to cover the United Kingdom and United States, but the team are working on ensuring it works equally well for Australia, Canada, and New Zealand.  They describe the Qindex as being akin to the Washington Post fact-checker, albeit with a slightly more scientific basis to it.

“Our measurement is more scientific and can provide further insight into the uncertainty of financial markets at any given moment,” they conclude.

The research team are publishing Qindices on a monthly basis and those can be found on www.qualityofpoliticalsignals.com.