Does Market Irrationality in the Media Affect Stock Returns?

Rajna GIBSON Brandon, Christopher Hemmens and Mathieu Trépanier
Additional contact information
Rajna GIBSON Brandon: University of Geneva and Swiss Finance Institute
Christopher Hemmens: University of Geneva
Mathieu Trépanier: University of St Gallen

No 15-25, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Linguistics; Market Irrationality; Mean-Reversion; Media; Stock Market Returns; Volatility (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2015-07
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=2641777 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1525

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().