Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text

60 Pages Posted: 2 Aug 2021 Last revised: 9 Feb 2023

See all articles by Leland Bybee

Leland Bybee

Yale School of Management

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Yinan Su

Johns Hopkins University - Carey Business School

Date Written: January 14, 2022

Abstract

We estimate a narrative factor pricing model from news text of The Wall Street Journal. Our empirical method integrates topic modeling (LDA), latent factor analysis (IPCA), and variable selection (group lasso). Narrative factors achieve higher out-of-sample Sharpe ratios and smaller pricing errors than standard characteristic-based factor models and predict future investment opportunities in a manner consistent with the ICAPM. We derive an interpretation of the estimated risk factors from narratives in the underlying article text.

Keywords: news, narratives, textual analysis, cross section of returns, ICAPM, factor model, IPCA, variable selection

JEL Classification: C38, C52, G11, G12

Suggested Citation

Bybee, Leland and Kelly, Bryan T. and Su, Yinan, Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text (January 14, 2022). Johns Hopkins Carey Business School Research Paper No. 21-09, Available at SSRN: https://ssrn.com/abstract=3895277 or http://dx.doi.org/10.2139/ssrn.3895277

Leland Bybee

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yinan Su

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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