Comovement and the News

Abstract:     
I introduce a novel approach for the empirical analysis of asset price comovement that relates the inter-firm textual similarity of news reports to their equity return correlation. I find that this measure of news similarity can predict an economically meaningful portion of future cross-firm comovement even after accounting for the pair’s contemporaneous return correlation. This predictability is also robust to industry, size, book-to-market, momentum, liquidity, and price-decile correlation, index membership, and headquarters location, as well as institutional holding, analyst coverage, and author sentiment. These results contribute to the growing literature examining the role of the media in financial markets, and provide empirical support for an alternative description of return comovement that does not depend on friction-based explanations such as “category,” “habitat,” or “information diffusion.”

Number of Pages in PDF File: 60

Keywords: Comovement, Financial Media, Dynamic Panel Estimation, Textual Analysis, Correlation

JEL Classification: C33, C53, D83, G00, G11, G12, G14

working papers series