[NVIX interactive chart] [Slides] Journal of Financial Economics, forthcoming
We extend back to 1890 the volatility implied by options index (VIX), available only since 1986, using the frequency of words on the front-page of the Wall Street Journal. News implied volatility (NVIX) captures well the disaster concerns of the average investor over this longer history. NVIX is particularly high during stock market crashes, times of policy-related uncertainty, world wars and financial crises. We find that periods when people are more concerned with a rare disaster, as proxied by news, are either followed by periods of above average stock returns, or followed by periods of large economic disasters. We estimate that the disaster probability has a half-life of four to eight months and annual volatility of 4% to 6%. Our findings are consistent with the view that hard to measure time-varying rare disaster risk is an important driver behind asset prices.