- The efficient market hypothesis states that the market
incorporates all available information to provide an
accurate valuation of the asset at any given time.
However, most models for forecasting the return or
volatility of assets completely disregard the arrival of
asset specific news (i.e., news which is directly relevant to
the asset). In this paper we propose a simple adaptation to
the GARCH model to make the model aware of news.
We propose that the content of news is important and
therefore describe a methodology to classify asset specific
news based on the content. We present evidence from the
US, UK and Australian markets which show that this
model improves high frequency volatility forecasts. This
is most evident for news which has been classified based
on the content. We conclude that it is not enough to know
when news is released, it is necessary to interpret its
content.
(from crpit.com)
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