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Coronavirus ‘infodemic’: A data-driven approach to countering irrational market emotions

Richard Goldman
Richard Goldman
Head of Market Development, Quant and Feeds, Asia

“Coronavirus contagion.” “Airlines cancel flights.” “Global downturn looms.” “Supply chains threatened.” – These are only some of the headlines carried by news outlets around the world in response to the coronavirus outbreak.

This novel strain of the disease – known as COVID-19 – has wreaked havoc in China and spread to dozens of other countries, triggering emergency measures such as office and school closures, travel restrictions and quarantine zones covering entire cities.[1]

The ensuing disruption and anxiety have hurt investor sentiment and pushed US,[2] European[3] and Australian stock markets,[4] among others, to end February 2020 with their worst weekly performance since the 2008 financial crisis. Is this a rational and proportional reaction to the facts at hand? Or are investors being swayed by their fears compounded by the media’s reporting of the virus? And in what ways do shifting sentiments and the constant stream of information influence market moves?

To address these questions and examine current trends, Refinitiv hosted a webinar entitled “Tracking Fear Cycles in Markets – Putting the Coronavirus Infodemic in Context.” The issue is one that resonates with investors worldwide trying to make sense of the outbreak’s impact on markets, as demonstrated by an audience poll during the webinar.

The presentation was led by MarketPsych CEO and Founder Dr. Richard Peterson, whose firm uses produces actionable data derived from real-time analytics of qualitative statements in the news and social media. This is a crucial service in today’s investing world because COVID-19 is “the first epidemic of the social media age,” as Refinitiv’s Market Development Director of Quant and Feeds, Richard Goldman, observed during the webinar.

Mobile phone alerts, tweets, Facebook posts and live blogs are just a few of the tools at our disposal to disseminate and share information. And because people tend to follow the news more closely during times of crisis, this abundance of information often culminates in an ‘infodemic,’ which can alter behavioral patterns, including on the trading floor.

Indeed, research by MarketPsych shows that quantifying the link between media coverage and its influence on investor perception can help predict stock price movements and provide buy or sell signals to investors, traders and wealth managers.

“Investor sentiment is a major factor in terms of predicting price action and managing risk,” Goldman noted, adding that advances in technology, such as machine learning, are providing “a level of granularity that wasn’t possible using traditional data.”

A psychological perspective

For Dr. Peterson, psychological insights are essential to understand market cycles and make profitable investment decisions. Heightened stress and uncertainty as observed during health scares, he explained, cause people to seek additional information because we are conditioned to identify new threats and exercise caution until we feel secure. “There’s the rational notion of the epidemic and how it’s likely to spread and its likely economic impact, but what also affects markets is the psychological,” he said.

However, if the media coverage around an event is perceived to be negative or alarmist, it can exacerbate the sense of fear and panic.

“Media tone contributes to collective biases as well. First, we underreact to that information but then, as that information starts to trigger certain fears in our brains, we become panicky. Even if it’s irrational, fear changes economic behavior,” he noted. “So looking at fear visually helps us to understand how this will progress.”

With the goal of delivering such visualizations, Refinitiv’s MarketPsych Indices (RMI) use patented natural language processing software to scour hundreds of news sources, blogs and social media sites for information and sentiment on a range of subjects – from companies to currencies – to create unique aggregated indexes.

Drawing parallels with past epidemics

The webinar demonstrated how investors can apply the relevant RMI to evaluate asset performances during previous epidemics, draw comparisons with the current coronavirus outbreak and gauge the bottom to find the right buying opportunity. This approach helps investors benefit from the rebound that typically follows when the virus – and the fear surrounding it – die down.

Take the impact of the 2003 SARS epidemic on the value of Cathay Pacific’s stock as an example. The increasing frequency and volume of media references to the illness in Hong Kong, represented by the Human Infectious Diseases (HK) RMI, matched the city’s diverging sentiment and fear indicators. This foreshadowed the Cathay Pacific selloff in March and April of that year. When the Hong Kong Fear and Sentiment moving averages began to realign, despite the sustained news coverage of SARS, the RMI trajectories acted as a signal to investors that the airline’s stock had reached its lowest point and a rebound was on the cards. MarketPsych also found similar patterns when studying the correlation between the price movements of key airline stocks and media coverage of the 2009 swine flu and 2014 Ebola outbreaks.

Consequently, this same lens can be used to view the financial markets today amid the COVID-19 outbreak, giving investors the insight to anticipate price movements and adjust their portfolios accordingly. The general rule of thumb, Dr. Peterson advised, would be to not make a buying decision until the media sentiment begins to turn towards the positive and fear starts to decline.

Of course, broader economic and political contexts must be taken into account with this kind of modelling, and investors should consider the impact of actions such as media suppression or censorship by governments, which would manipulate the reporting of facts and, in turn, public awareness.

Nonetheless, the old saying that words have power certainly rings true. Information and the tone in which it is conveyed affects the mentality of market participants. Therefore, it is vital to engage innovative tools that can help analyze and visualize the impact of subjective text on human behavior in order to develop a successful investment strategy.

“Just as everyone has price data and economic data, in the long-term, they will have information flow-based data because information is what fundamentally drives markets,” concluded Dr. Peterson.

[1] https://www.businessinsider.com/wuhan-coronavirus-officials-quarantine-entire-city-2020-1

[2] https://www.reuters.com/article/us-global-markets/wall-street-bounce-too-little-too-late-as-world-stocks-post-shock-weekly-decline-idUSKCN20M001

[3] https://www.reuters.com/article/us-europe-stocks/european-stocks-shed-1-5-trillion-as-virus-fears-spur-week-long-selling-frenzy-idUSKCN20M137

[4] https://www.reuters.com/article/australia-stocks-close/australian-shares-post-worst-weekly-drop-since-2008-financial-crisis-nz-falls-idUSL3N2AS2AS

Listen Now:

Listen and review the webcast recording with Dr. Richard Peterson, MarketPysch’s CEO and Refinitiv’s Richard Goldman Market Development Director, Quant and Feeds, who presented Refinitiv’s research and insights on the current pandemic; reviewing the impact across different sectors in APAC.


How to track the market developments:

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