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Asset returns, news topics, and media effects

Author

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  • Vegard H. Larsen

    (Norges Bank (Central Bank of Norway))

  • Leif Anders Thorsrud

    (Norges Bank (Central Bank of Norway))

Abstract

We decompose the textual data in a daily Norwegian business newspaper into news topics and investigate their predictive and causal role for asset prices. Our three main findings are: (1) a one unit innovation in the news topics predict roughly a 1 percentage point increase in close-to-open returns and significant continuation patterns peaking at 4 percentage points after 15 business days, with little sign of reversal; (2) simple zero-cost news-based investment strategies yield significant annualized risk-adjusted returns of up to 20 percent; and (3) during a media shortage, due to an exogenous strike, returns for firms particularly exposed to our news measure experience a substantial fall. Our estimates suggest that between 20 to 40 percent of the news topics' predictive power is due to the causal media effect. Together these findings lend strong support for a rational attention view where the media alleviate information frictions and disseminate fundamental information to a large population of investors.

Suggested Citation

  • Vegard H. Larsen & Leif Anders Thorsrud, 2017. "Asset returns, news topics, and media effects," Working Paper 2017/17, Norges Bank.
  • Handle: RePEc:bno:worpap:2017_17
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Vegard H. Larsen & Leif Anders Thorsrud & Julia Zhulanova, 2019. "News-driven inflation expectations and information rigidities," Working Paper 2019/5, Norges Bank.
    2. repec:spr:cliomt:v:13:y:2019:i:1:d:10.1007_s11698-018-0171-7 is not listed on IDEAS
    3. Vegard Høghaug Larsen & Leif Anders Thorsrud, 2018. "Business cycle narratives," Working Papers No 6/2018, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    4. Leif Anders Thorsrud, 2016. "Nowcasting using news topics Big Data versus big bank," Working Papers No 6/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    5. Mosi Rosenboim & Yossi Saadon & Ben Z. Schreiber, 2018. "“Much Ado about Nothing”? The Effect of Print Media Tone on Stock Indices," Bank of Israel Working Papers 2018.10, Bank of Israel.
    6. Lino Wehrheim, 2017. "Economic History Goes Digital: Topic Modeling the Journal of Economic History," Working Papers 177, Bavarian Graduate Program in Economics (BGPE).

    More about this item

    Keywords

    Stock returns; News; Machine learning; Latent Dirichlet Allocation (LDA);

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • G4 - Financial Economics - - Behavioral Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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