Abstract
We investigate the relationship between media sentiment and international equity prices using a new dataset of 4 million news articles published between 1991 and 2015. Three key results emerge. First, news sentiment robustly predicts future daily returns around the world. However, we find a sharp contrast between the effect of local news and that of global news: whereas local news optimism (pessimism) predicts a small and transitory increase (decrease) in local equity returns, global news sentiment has a larger impact on returns that does not reverse in the short run. Second, news sentiment affects local prices mainly through the investment decisions of foreign—rather than local—investors. Third, large variations in global news sentiment predominantly happen in the absence of new information about fundamentals, suggesting that movements in global sentiment capture variations in investors sentiment. Taken together, our findings illustrate the key role played by foreign news and investors sentiment in driving local asset prices.
Highlights
This paper formally investigates the link between media sentiment and equity prices around the world, focusing on the following questions
To uncover which type of investors drive these movements in equity prices, we extend our analysis to international equity flows
We show that our key results are robust to introducing the Economic Policy Uncertainty index (EPU) in our estimation (Baker, Bloom and Davis (2016)), suggesting that changes in global news sentiment are not driven by variations in the uncertainty expressed in economic news
Summary
This paper formally investigates the link between media sentiment and equity prices around the world, focusing on the following questions. The tone of global news could induce swings in investors sentiment – or so-called “animal spirits” – leading to movements in local asset prices occurring even though no new information on the state of the world economy has emerged (Shiller (2015)). Distinguishing these two hypotheses is difficult, we present indirect evidence favoring the latter. Our findings relate to the growing body of research investigating the link between the news media, investors sentiment, and asset prices (Tetlock (2007), Garcia (2013), Manela and Moreira (2017), Calomiris and Mamaysky (2019)) We contribute to this literature in several ways.
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