Working Paper: CEPR ID: DP13366
Authors: Samuel Fraiberger; Do Lee; Damien Puy; Romain Rancière
Abstract: We investigate the relationship between media sentiment and international equity prices using a new dataset of 4 million news articles published between 1991 and 2015. Three key results emerge. First, news sentiment robustly predicts (future) daily returns around the world. How- ever, we find a sharp contrast between the effect of local news and that of global news: whereas local news optimism (pessimism) predicts a small and transitory increase (decrease) in local equity returns, global news sentiment has a larger impact on returns that does not reverse in the short run. Second, news sentiment affects local prices mainly through the investment decisions of foreign – rather than local – investors. Third, large variations in global news sentiment predominantly happen in the absence of new information about fundamentals, suggesting that movements in global sentiment capture variations in investors sentiment. Taken together, our findings illustrate the key role played by foreign news and investors sentiment in driving local asset prices.
Keywords: asset pricing; capital flows; behavioral finance; investor sentiment; news media; natural language processing
JEL Codes: F32; G12; G15; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| News Sentiment (G14) | Future Daily Returns (Globally) (G17) |
| Local News Sentiment (R23) | Local Equity Returns (G12) |
| Global News Sentiment (F01) | Local Equity Returns (G12) |
| One Standard Deviation Increase in Global News Optimism (F69) | Permanent Increase in Equity Returns (G12) |
| Local News Sentiment (R23) | Foreign Investor Decisions (F21) |
| Large Shifts in Global News Sentiment (F01) | Changes in Investor Sentiment (G41) |