Media, sentiment and market performance in the long run

Roman Kräussl, Elizaveta Mirgorodskaya*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

This paper investigates the impact of media pessimism on financial market returns and volatility in the long run. We hypothesize that media sentiment translates into investor sentiment. Based on the underreaction and overreaction hypotheses [Barberis, N., A. Shleifer, and R. Vishny. 1998. “A Model of Investor Sentiment.” Journal of Empirical Economics 49 (3): 307–343], we suggest that media pessimism has an effect on market performance after a lag of several months. We construct a monthly media pessimism indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and in the lead paragraph. Our results indicate that media pessimism is associated with negative (positive) market returns 14–17 (24–25) months in advance and positive market volatilities 1–20 months in advance. Our results are statistically and economically significant. We find evidence for Granger causality of media pessimism on market performance. Our media pessimism indicator possesses additional predictive power for the Baker and Wurgler [2006. “Investor Sentiment and the Cross-section of Stock Returns.” Journal of Finance 61 (4): 1645–1680] investor sentiment index and the Chicago Board Options Exchange Market Volatility Index.

Original languageEnglish
Pages (from-to)1059-1082
Number of pages24
JournalEuropean Journal of Finance
Volume23
Issue number11
DOIs
Publication statusPublished - 2 Sep 2017

Keywords

  • mean-reversion
  • news media
  • overreaction
  • sentiment
  • underreaction

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