News Implied Volatility and Aggregate Economic Activity: Evidence from the Japanese Government Bond Market

Because options on 10-year Japanese government bonds (JGB) futures are relatively new in the market, their implied volatility, JGB-VIX, is not available before 2007. For the period when JGB-VIX is available, we conduct supervised learning by using the daily newspaper articles as input and JGB-VIX as output. We then construct a new JGB market uncertainty measure, which we called JGB-NU, based on the predicted values of JGB-VIX from the estimated model and contents of the newspaper articles from 1981 to 2017. In the VAR analysis with JGB-NU, we confirm that JGB market uncertainty shocks have a negative impact on real economic activities in Japan.