Wisdom of crowds before the 2007–2009 global financial crisis

Michael Chau, Chih-Yung Lin and Tse-Chun Lin

Journal of Financial Stability, 2020, vol. 48, issue C

Abstract: Our paper examines whether investor opinions expressed in social media predicted stock returns of financial firms during the 2007–2009 global financial crisis. We conduct a textual analysis of the articles published on the stock market insight website Seeking Alpha before the crisis and find that banks that were described in articles with a higher fraction of negative words experienced (1) sharper drops in stock prices, (2) larger increases in expected default probability, and (3) greater surges in nonperforming loans during the crisis. Our evidence suggests that wisdom of crowds provides valuable information on how banks weather a forthcoming crisis.

Keywords: Social media; Textual analysis; Financial crisis; Predictability; Seeking alpha (search for similar items in EconPapers)
JEL-codes: G01 G14 G17 G21 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:48:y:2020:i:c:s157230892030019x

DOI: 10.1016/j.jfs.2020.100741

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