51 Pages Posted: 12 Aug 2015 Last revised: 19 Aug 2015
Date Written: July 21, 2015
This paper investigates whether news suggestive of irrationality within financial markets have an impact on stock returns. We construct a lexicon of words for 'market irrationality' and score daily news articles based on the number and proportion of words they contain from the lexicon. We find that reported market irrationality has a significant negative impact on subsequent stock market returns and exacerbates stock market volatility. Furthermore, stocks with large, negative irrationality risk betas outperform stocks with large, positive betas on average by 10.3% annually. Accounting for the Fama-French factors, this results in an alpha of 8.6% annually, which is significant at the 1% level. These results suggest that a large, positive IRR beta amplifies a stock's reaction to market irrationality while a large, negative IRR beta dampens it. The subsequent IRR betas' mean-reversion is consistent with this conjecture.
Keywords: Linguistics, Market Irrationality, Mean-Reversion, Media, Stock Market Returns, Volatility.
JEL Classification: G02, G12, G14
Suggested Citation: Suggested Citation
Gibson , Rajna and Hemmens, Christopher and Trepanier, Mathieu, Does Market Irrationality in the Media Affect Stock Returns? (July 21, 2015). Swiss Finance Institute Research Paper No. 15-25. Available at SSRN: https://ssrn.com/abstract=2641777 or http://dx.doi.org/10.2139/ssrn.2641777
By Andrew Lo