Abstract
We assess the impact of media sentiment on international equity prices using more than 4.5 million Reuters articles published across the globe between 1991 and 2015. News sentiment robustly predicts daily returns in both advanced and emerging markets, even after controlling for known determinants of stock prices. But not all news-sentiment is alike. A local (country-specific) increase in news optimism (pessimism) predicts a small and transitory increase (decrease) in local returns. By contrast, changes in global news sentiment have a larger impact on equity returns around the world, which does not reverse in the short run. We also find evidence that news sentiment affects mainly foreign – rather than local – investors: although local news optimism attracts international equity flows for a few days, global news optimism generates a permanent foreign equity inflow. Our results confirm the value of media content in capturing investor sentiment.
Highlights
The amount financial and economic news has increased dramatically over the past 20 years
Using more than 4.5 million Reuters articles published across the globe between 1991 and 2015, we find that news tone – our measure of news sentiment - robustly predicts daily returns in both advanced and emerging markets, even after controlling for known determinants of stock prices
Changes in global news sentiment have a larger impact on equity returns around the world that does not reverse in the short run, suggesting a novel and arguably stronger source of sentiment-driven asset price fluctuations
Summary
The amount financial and economic news has increased dramatically over the past 20 years. Changes in global news sentiment have a larger impact on equity returns around the world that does not reverse in the short run, suggesting a novel and arguably stronger source of sentiment-driven asset price fluctuations. Combining our news sentiment indices with daily equity flows from mutual funds investing in sixteen EMs between 2007 and 2015, we find an effect strikingly close to that of stock returns: local news optimism attracts equity flows for a few days only, global sentiment optimism attracts them permanently. Sudden changes in optimism (or pessimism) in global news generate a permanent increase (decrease) of 25 basis points - roughly five times the size of the local sentiment shock – that reaches its peak slowly after ten to fifteen days, both in Advanced Economies (AEs) and in Emerging Markets (EMs).
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