Download This PaperLanguage Sentiment in Fundamental and Noise Trading: Evidence from Crude Oil
38 Pages Posted: 28 Apr 2020
Date Written: April 5, 2020
Abstract
Recent research has found the language sentiment in financial news to be a substantial driver of prices in financial markets, though there are two diametrically opposed interpretations for this: either markets perceive news sentiment as fundamental information (thus leading to changes in the valuation of assets) or news sentiment conveys a noise signal (thus contributing to the stochastic component of prices). The opposite roles are resolved in the context of crude oil prices by decomposing price movements into two components referring to fundamental and noise trading. Contrary to theoretical arguments in prior literature, we find empirical results supporting both interpretations.
Keywords: Kalman filter, State-space model, News sentiment, Noise trader theory, Crude oil
JEL Classification: C51, D84, G02, G14
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