Abstract
News contains valuable conditioning information that captures time-varying investor concern over different aspects of the macroeconomy. We create separate news measures to approximate investor concern about consumption growth, inflation, and unemployment by associating front-page articles in the Wall Street Journal with the respective macroeconomic factors. For each macroeconomic variable, we construct a news conditional macro model and compare its cross-sectional pricing power against that of the corresponding macro 1-factor beta-model. Next, we focus on our consumption-based news measure and simulate a long-short trading strategy based on news beta-loadings of NYSE and AMEX stocks. Strategy returns are significant and robust to adjusting for Fama French 3-factor risk. Finally, we show our news measures capture aspects of investor concern related to changes in macroeconomic forecasts. We discuss the implications of our consumption-based news measure for three important macro asset pricing models: Habit, Rare Disaster, and Long Run Risk. Our empirical findings do not support the Habit or Rare Disaster models. However, we find evidence in favor of the Long Run Risk model.
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