Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text

Leland Bybee, Bryan Kelly, Yinan Su and Tarun Ramadorai

The Review of Financial Studies, 2023, vol. 36, issue 12, 4759-4787

Abstract: We estimate a narrative factor pricing model from news text of The Wall Street Journal. Our empirical method integrates topic modeling (LDA), latent factor analysis (IPCA), and variable selection (group lasso). Narrative factors achieve higher out-of-sample Sharpe ratios and smaller pricing errors than standard characteristic-based factor models and predict future investment opportunities in a manner consistent with the ICAPM. We derive an interpretation of the estimated risk factors from narratives in the underlying article text.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

JEL-codes: C38 C52 G11 G12 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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