Working Paper: NBER ID: w30195
Authors: William N. Goetzmann; Dasol Kim; Robert J. Shiller
Abstract: The financial press is a conduit for popular narratives that reflect collective memory about historical events. Some collective memories relate to major stock market crashes, and investors may rely on associated narratives, or “crash narratives,” to inform current beliefs and choices. Using recent advances in computational linguistics, we develop a higher-order measure of narrativity based on newspaper articles that appear following major crashes. We provide evidence that crash narratives propagate broadly once they appear in news articles, and significantly explain predictive variation in market volatility. We exploit investor heterogeneity using survey data to distinguish the effects of narrativity and fundamental conditions and find consistent evidence. Finally, we develop a measure of pure narrativity to examine when the financial press is more likely to employ narratives.
Keywords: narratives; market volatility; investor behavior; collective memory
JEL Codes: E03; G00; G02; G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| crash narratives (G01) | market volatility (G17) |
| crash narratives (G01) | investor attention to stock market crashes (G01) |
| crash narratives (previous day) (G01) | crash attention (G01) |
| crash narratives (G01) | individual investors' crash beliefs (G41) |
| crash narratives (G01) | institutional investors' crash beliefs (G41) |
| crash narratives in lede (Y60) | investor behavior (G41) |
| pure narrativity measure (C52) | investor beliefs (G41) |