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Fake news and half-truths take a toll on financial markets

Three University of Canterbury (UC) financial economists have shed light on a puzzling relationship between economic policy uncertainty and the Volatility Index (VIX) – fear gauge of the stock market, and how the quality of political signals impacts on this relationship in a new research paper.

The research group (L to R) Dr Huong Dang, Professor Jedrzej Bialkowski and Dr Xiapeng Wei.

“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,” Professor Bialkowski says.

“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.”

The research has resulted in developing a measure – Qindex – for the quality of political signals.

“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. 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.”

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