Working Paper: CEPR ID: DP15756
Authors: Alex Edmans; Adrian Fernandez; Alexandre Garel; Ivan Indriawan
Abstract: This paper introduces a real-time, continuous measure of national sentiment that is language-free and thus comparable globally: the positivity of songs that individuals choose to listen to. This is a direct measure of mood that does not pre-specify certain mood-affecting events, nor assume the extent of their impact on investors. We validate our music-based sentiment measure by correlating it with mood swings induced by seasonal factors and weather conditions. We find that music sentiment is positively correlated with same-week market returns and negatively correlated with next-week returns, consistent with sentiment-induced temporary mispricing. Results also hold under a daily analysis and are stronger when short-sale constraints limit arbitrage. Music sentiment also predicts increases in net mutual fund flows, and absolute sentiment precedes a rise in stock market volatility.
Keywords: Investor Sentiment; Investor Mood; Behavioral Finance
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Music sentiment (Y60) | Net mutual fund flows (G23) |
| Absolute music sentiment (E32) | Stock market volatility (G17) |
| Music sentiment (Y60) | Same-week market returns (G14) |
| Music sentiment (Y60) | Next-week market returns (G17) |