Market risk tends to rise when recent news has been more surprising than before.

Question

BlackTom AI · Accepted Answer

Here is a step-by-step examination of the statement and each answer option, considering how market risk relates to news Surprise.
Option 1: 'Make sense' – This choice asserts that market risk rises when recent news has been more surprising than before. This aligns with common financial intuition: unexpected or surprising news tends to increase uncertainty, trigger reactions in asset prices, widen volatility, and elevate risk premia as traders update beliefs. If the news surprise grows relative to prior periods, investors may reassess risk exposures, leading to larger price swings and higher perceived risk in the market. The reasoning hinges on the idea that surprise in information increases information asymmetry temporarily and raises uncertainty about future cash flows or economic conditions, which typically translates to higher market risk.
Option 2: 'Make no sense' – This option denies a relationship between surprise in news and market risk. If one argues this, they might claim that markets are always perfectly efficient and instantly price all surprises, or that risk is driven solely by fundamentals and not by the surprise component of news. In reality, however, empirical and theoretical considerations recognize that unexpected news can cause volatility bursts and reposition risk assessments. Therefore, saying that there is no link between news surprise and market risk overlooks the role of volatility clustering, news-driven risk re-pricing, and the behavioral and information-based channels through which surprises influence risk perception. This makes the claim less tenable.
In summary, the logic behind option 1 rests on the notion that greater surprise in information leads to higher uncertainty and risk, while option 2 would require an assumption that surprises do not alter risk perceptions, which contradicts standard market dynamics. The contrast rests on whether one accepts that surprise drives volatility and risk as part of the information flow to markets.

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Market risk tends to rise when recent news has been more surprising than before.

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