News about government policy isn’t just background noise : it’s a major driver of stock-market volatility. This paper builds a new measure of “equity market volatility” using newspaper articles and finds that policy-related news (fiscal, monetary, trade, regulation) explains a large share of volatility spikes. The implication for investors: tracking policy signals is essential, not optional.
Policy News and Stock Market Volatility
- Scott Baker, Nicholas Bloom, Steven J. Davis & Kyle Kost
- Journal of Financial Economics, 2025
- A version of this paper can be found here
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Key Academic Insights
Policy news equals volatility waves
The authors build an “Equity Market Volatility” (EMV) tracker based on newspaper mentions of volatility. Their measure closely matches the VIX and realized stock return volatility. Importantly, about 35% of the volatility-linked articles referenced fiscal policy (taxes), 30% referenced monetary policy, and 25% referenced regulation.
Policy matters more than you think
Different types of policy news carry different weights. Trade policy, for example, went from a trivial factor to a leading driver of volatility after the U.S.–China tensions. The share of policy-related volatility articles rose significantly around 2017-18.
Firm-level sensitivity to policy news
By linking the EMV measure to text in 10-K filings, the paper shows that firms with higher exposure to policy news have higher realized volatility. In other words, policy news doesn’t just rattle the broad market, it also creates firm-specific risk.
Practical Applications for Investment Advisors
Stay ahead of policy waves
Advisors should track not only economic or earnings news, but policy-specific signals: tax changes, regulatory initiatives, trade developments. These can act as early warnings for increased equity market volatility.
Adjust portfolio risk when policy uncertainty spikes
When policy-related news coverage rises sharply (e.g., large-scale tax reform or trade war escalation), consider reducing equity exposure or increasing hedges. The research shows these policy episodes align with volatility surges.
Tailor firm-level portfolios based on policy exposure
For individual stocks or sectors, assess how policy news might uniquely affect them. Firms tied to regulation, trade, or fiscal incentives may carry elevated volatility risk tied to policy windows
Communicate the “policy risk premium” to clients
Explain to clients that it’s not only macroeconomics that matters, government decisions themselves can drive risk. Incorporating policy-news indicators into portfolio strategy enhances preparedness for uncertain policy regimes.
How to Explain This to Clients
“Markets don’t just react to what companies announce, they react to what governments do and say. This research shows that a big part of market ups and downs comes from policy headlines: taxes, regulation, trade deals. By tuning into those signals, we can better foresee when risk is about to jump, and position your portfolio accordingly.”
The Most Important Chart from the Paper
Figure 1: Newspaper-Based Equity Market Volatility Tracker, 1985-2018
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.
Abstract
We exploit the text in newspapers and 10-K filings to quantify the drivers of aggregate and firm-level stock market volatility. We first create a newspaper-based Equity Market Volatility (EMV) tracker that moves closely with the VIX and the volatility of returns on the S&P 500. Parsing the underlying text, we then construct forty category-specific EMV trackers. News about commodity markets, interest rates, real estate markets, aggregate activity and inflation figure prominently in EMV articles, with large category-specific variation over time. Policy news is another major source of market volatility: 30 percent of EMV articles discuss tax policy, 30 percent discuss monetary policy, and 25 percent refer to some form of regulation. Trade policy news went from a virtual nonfactor in market volatility to a leading source after U.S.-China trade tensions escalated. Next, we use 10-K filings to quantify firm-level exposures to the same forty risk categories. Combining our newspaper-based measures with our textual analysis of 10-K filings, we obtain monthly firm-level risk exposure measures. Finally, we show that these measures are highly statistically significant in explaining the firm-level structure of realized equity market volatilities at the monthly frequency, even after conditioning on firm effects, time effects and industry-time effects.
About the Author: Elisabetta Basilico, PhD, CFA
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Important Disclosures
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.
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