Asset returns, news topics, and media effects

Vegard Larsen and Leif Thorsrud

No 2017/17, Working Paper from Norges Bank

Abstract: We decompose the textual data in a daily Norwegian business newspaper into news topics and investigate their predictive and causal role for asset prices. Our three main findings are: (1) a one unit innovation in the news topics predict roughly a 1 percentage point increase in close-to-open returns and significant continuation patterns peaking at 4 percentage points after 15 business days, with little sign of reversal; (2) simple zero-cost news-based investment strategies yield significant annualized risk-adjusted returns of up to 20 percent; and (3) during a media shortage, due to an exogenous strike, returns for firms particularly exposed to our news measure experience a substantial fall. Our estimates suggest that between 20 to 40 percent of the news topics' predictive power is due to the causal media effect. Together these findings lend strong support for a rational attention view where the media alleviate information frictions and disseminate fundamental information to a large population of investors.

Keywords: Stock returns; News; Machine learning; Latent Dirichlet Allocation (LDA) (search for similar items in EconPapers)
JEL-codes: C5 C8 G12 G4 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2017-09-19
References: Add references at CitEc
Citations: View citations in EconPapers (17)

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http://www.norges-bank.no/en/Published/Papers/Working-Papers/2017/172017/

Related works:
Journal Article: Asset returns, news topics, and media effects (2022)
Working Paper: Asset returns, news topics, and media effects (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2017_17

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