Risky news and credit market sentiment

Paul Labonne () and Leif Thorsrud

No No 14/2023, Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School

Abstract: The nonlinear nexus between financial conditions indicators and the conditional distribution of GDP growth has recently been challenged. We show how one can use textual economic news combined with a shallow Neural Network to construct an alternative financial indicator based on word embeddings. By design the index associates growth-at-risk to news about credit, leverage and funding, and we document that the proposed indicator is particularly informative about the lower left tail of the GDP distribution and delivers significantly better out-of-sample density forecasts than commonly used alternatives. Speaking to theories on endogenous information choice and credit-market sentiment we further document that the news-based index likely carries information about beliefs rather than fundamentals.

Pages: 45 pages
Date: 2023-12
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bny:wpaper:0126

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