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Does Market Irrationality in the Media Affect Stock Returns?

Author

Listed:
  • Rajna GIBSON BRANDON

    (University of Geneva and Swiss Finance Institute)

  • Christopher HEMMENS

    (University of Geneva)

  • Mathieu TRÉPANIER

    (University of St Gallen)

Abstract

This paper investigates whether news suggestive of irrationality within financial markets have an impact on stock returns. We construct a lexicon of words for 'market irrationality' and score daily news articles based on the number and proportion of words they contain from the lexicon. We find that reported market irrationality has a significant negative impact on subsequent stock market returns and exacerbates stock market volatility. Furthermore, stocks with large, negative irrationality risk betas outperform stocks with large, positive betas on average by 10.3% annually. Accounting for the Fama-French factors, this results in an alpha of 8.6% annually, which is significant at the 1% level. These results suggest that a large, positive IRR beta amplifies a stock's reaction to market irrationality while a large, negative IRR beta dampens it. The subsequent IRR betas' mean-reversion is consistent with this conjecture.

Suggested Citation

  • Rajna GIBSON BRANDON & Christopher HEMMENS & Mathieu TRÉPANIER, 2015. "Does Market Irrationality in the Media Affect Stock Returns?," Swiss Finance Institute Research Paper Series 15-25, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1525
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    File URL: http://ssrn.com/abstract=2641777
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    More about this item

    Keywords

    Linguistics; Market Irrationality; Mean-Reversion; Media; Stock Market Returns; Volatility;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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