New research from a Brock University economist contradicts conventional wisdom when it comes to the stock market’s reaction to economic news.

The common belief suggesting stock markets do better when the economy is doing well is countered by Ivan Medovikov, assistant professor in Brock’s Department of Economics. The reality, according his research, published this month by the Journal of Banking & Finance, is that only when economic news holds doom and gloom, does the market really listen.

“Unusually bad macroeconomic news tends to lead to substantial market declines, while equally unusually good news has little market effect,” explains Medovikov in his paper. He says stocks seem to ignore good news about the economy, but the arrival of bad news has a strong and negative effect.

Can we profit from pessimism? Yes, according to Medovikov. If we pay attention to the news and act quickly, the study suggests that by selling stocks short in the wake of bad announcements, one can beat the market by as much as nine per cent per year.

If you don’t believe him, you can try it yourself. For his research, Medovikov developed a new, comprehensive measure of economic news called the Macroeconomic News Index, a tool now available to the public at www.macronewsindex.net

He began by classifying and indexing news stories focused on items in five key categories of economic conditions. He used only the news wires carried by Thomson Reuters and the Dow Jones Energy Service, two of the leading providers of business and economic information.

After collecting relevant news releases and categorizing them as positive, negative or neutral, Medovikov built a model of association between economic news and the stock market using statistical theory of copulas. His results show that publicly available information can be used to increase profits, an idea that contradicts our current view of how the stock market operates.

Medovikov’s research was funded in part by the Council for Research in the Social Sciences (CRISS) at Brock University, which advances research and scholarship through the administration of small research grants awarded to faculty members through a peer-reviewed, transparent process adjudicated by a committee of faculty members. The committee is chaired by Diane Dupont, the Associate Dean, Graduate Studies and Research.

“I am really excited that CRISS was able to support this line of research that Ivan has begun,” says Dupont. “His work shows how innovative researchers can be when they harness their disciplinary tools to address real-world issues. It has been said that economics is the ‘dismal science.’ In one way, Ivan’s research supports this view, but in another way, he shows a promising new avenue that investors might consider adding to their decision-making tools to assist them in dealing with potentially adverse outcomes.”

The next competition for CRISS funding closes at noon on Monday, May 2.