Sentiment Spillover Effects for US and European Companies

Abstract

The fast-growing literature on the news and social media analysis provide empirical evidence that the financial markets are often driven by information rather than facts. However, the direct effects of sentiments on the returns are of main interest. In this paper, we propose to study the cross-industry influence of the news for a set of US and European stocks. The graphical Granger causality of the news sentiments - excess return networks is estimated by applying the adaptive Lasso procedure. We introduce two characteristics to measure the influence of the news coming from each sector and analyze their dynamics for a period of 10 years ranging from 2005 to 2014. The results obtained provide insight into the news spillover effects among the industries and the importance of sentiments related to certain sectors during periods of financial instability.

Keywords: TRMI, sentiment, news, lasso, Granger causality, news networks

JEL Classification: C01, C21, C50, C55, C58