Analyzing & predicting the impact of news on the ASI return of Colombo stock exchange through black-litterman model

Abstract

Considering the historical data, we can conclude that news on attacks, international political problems, natural disasters, and protests have a negative impact on the stock market return while changes in Government Acts and Election period have a positive impact on stock market return. Further, Monetary & Fiscal policy changes and news on major investments have a neutral impact on the return. The significance of the news has been tested using the t-distribution method. It concludes that Monetary & Fiscal policy changes and news on major investments don't have a significant impact on index returns while other selected events have a significant impact on the index returns. By applying the Black-Litterman model together with hypothetical views, one can develop a P matrix to derive/ predict the return of the index movement. Therefore, an investor/analyst can consider the significance level of the news items (t-distribution results) and the type of impact (negative/positive) when assigning numbers and views for the P matrix.