Media, Sentiment and Market Performance in the Long Run

Abstract

This paper investigates the impact of media pessimism on financial market returns and volatility in the long-run. We hypothesize that media sentiment translates into investor sentiment. Based on the underreaction and overreaction hypotheses (Barberis et al. 1998), we suggest that media pessimism has an effect on market performance after a lag of several months. We construct a monthly media pessimism indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and in the lead paragraph. Our results indicate that media pessimism is associated with negative (positive) market returns 14 to 17 (24 to 25) months in advance and positive market volatilities 1 to 20 months in advance. We find evidence for Granger causality of media pessimism on market performance. Our media pessimism indicator possesses additional predictive power for the Baker and Wurgler (2006) investor sentiment index and the VIX.

Keywords: Investor behavior; News media sentiment; Financial market crises; Pricing bubbles; Framing effects

JEL Classification: G01, G10, E32