66 Pages Posted: 4 Sep 2012 Last revised: 8 Aug 2017
Date Written: July 28, 2017
I introduce a method for gauging the qualitative similarity of firm-specific information based on linguistic commonality in newswire text. I show that this new qualitative similarity measure predicts future cross-firm return correlation even after accounting for the pair’s contemporaneous price comovement, common exposures to systematic risk, firm liquidity, price, index membership, text volume, headquarters location, product similarity, shared mutual fund or institutional ownership, common analyst following and newswire co-mentions. I also demonstrate that content produced solely by journalists cannot predict an economically meaningful portion of future comovement. Out-of-sample tests confirm that knowledge of qualitative similarity can also reduce portfolio risk.
Keywords: Comovement, Dynamic Panel Estimation, Textual Analysis, Correlation
JEL Classification: C33, C53, D83, G00, G11, G12, G14
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