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Daily Market News Sentiment and Stock Prices

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In recent years there has been a tremendous growth in the influx of news related to traded assets in international financial markets. This financial news is now available via print media but also through real-time online sources such as internet news and social media sources. The increase in the availability of financial news and investor’s ease of access to it has a potentially significant impact on market price formation as these news items are swiftly transformed into investors sentiment which in turn drives prices. Various commercial agencies have started developing their own financial news data sets which are used by investors and traders to support their algorithmic trading strategies. Thomson Reuters News Analytics (TRNA)1 is one such data set. In this study we use the TRNA data set to construct a series of daily sentiment scores for Dow Jones Industrial Average (DJIA) stock index component companies. We use these daily DJIA market sentiment scores to study the influence of financial news sentiment scores on the stock prices of these companies using a multi-factor model. We use an augmented Fama French Three Factor Model to evaluate the additional effects of financial news sentiment on stock prices in the context of this model. Our results suggest that even when market factors are taken into account, sentiment scores have a significant effect on Dow Jones constituent company returns and that lagged daily sentiment scores are often significant, suggesting that information compounded in these scores is not immediately reflected in security prices and related return series.

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File URL: http://eprints.ucm.es/33044/1/1511.pdf
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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2015-11.

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Length: 27 pages
Date of creation: Jul 2015
Handle: RePEc:ucm:doicae:1511
Note: Preprint submitted to Journal of Financial Markets
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  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
  2. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  3. Smales, Lee A., 2014. "News sentiment in the gold futures market," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 275-286.
  4. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
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  7. Andreas Storkenmaier & Martin Wagener & Christof Weinhardt, 2012. "Public information in fragmented markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(2), pages 179-215, June.
  8. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
  9. Groß-Klußmann, Axel & Hautsch, Nikolaus, 2011. "When machines read the news: Using automated text analytics to quantify high frequency news-implied market reactions," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 321-340, March.
  10. Joseph E. Engelberg & Christopher A. Parsons, 2011. "The Causal Impact of Media in Financial Markets," Journal of Finance, American Finance Association, vol. 66(1), pages 67-97, February.
  11. Bhattacharya, Utpal & Galpin, Neal & Ray, Rina & Yu, Xiaoyun, 2009. "The Role of the Media in the Internet IPO Bubble," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(03), pages 657-682, June.
  12. Paul C. Tetlock, 2010. "Does Public Financial News Resolve Asymmetric Information?," Review of Financial Studies, Society for Financial Studies, vol. 23(9), pages 3520-3557.
  13. Paul C. Tetlock & Maytal Saar-Tsechansky & Sofus Macskassy, 2008. "More Than Words: Quantifying Language to Measure Firms' Fundamentals," Journal of Finance, American Finance Association, vol. 63(3), pages 1437-1467, June.
  14. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  15. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
  16. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
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