News aware volatility forecasting: is the content of news important?

The efficient market hypothesis states that the market incorporates all available information to provide an accurate valuation of the asset at any given time. However, most models for forecasting the return or volatility of assets completely disregard the arrival of asset specific news (i.e., news which is directly relevant to the asset). In this paper we propose a simple adaptation to the GARCH model to make the model aware of news. We propose that the content of news is important and therefore describe a methodology to classify asset specific news based on the content. We present evidence from the US, UK and Australian markets which show that this model improves high frequency volatility forecasts. This is most evident for news which has been classified based on the content. We conclude that it is not enough to know when news is released, it is necessary to interpret its content