From News to Noise: Does Media Sentiment Drive Stock Market Volatility?

Pieter Nel and Renee van Eyden ()
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Pieter Nel: Department of Economics, University of Pretoria
Renee van Eyden: Department of Economics, University of Pretoria

No 202605, Working Papers from University of Pretoria, Department of Economics

Abstract: Does media sentiment create artificial volatility, or do stock markets efficiently filter media sentiment as noise? This study tests these hypotheses using daily data (1994-2024) across the S&P 500, Dow Jones, and NASDAQ. Principal Component Analysis decomposes four uncertainty measures into fundamental uncertainty (PC1) and media-amplified supply sentiment (PC2). EGARCH modeling reveals that media sentiment mutes rather than amplifies volatility contradicting behavioral finance predictions. Time Varying Granger causality tests suggests no causality from uncertainty variables to volatility, but volatility has a causal relationship with fundamental uncertainty. The asymmetric relationship demonstrates that information flows from stock markets to uncertainty sentiment, not uncertainty sentiment to stock markets. These findings support rational updating hypothesis where investors observe volatility and correctly infer elevated uncertainty, rather than being misled by media sentiment.

Keywords: Media sentiment; EGARCH modeling; Principal component analysis; Time-varying causality (search for similar items in EconPapers)
JEL-codes: C58 E44 G41 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-02
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