Wisdom of Crowds Before the 2007-2009 Global Financial Crisis

46 Pages Posted: 22 Apr 2020

See all articles by Michael Chau

Michael Chau

The University of Hong Kong

Chih-Yung Lin

National Chiao-Tung University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 28, 2020

Abstract

Our paper examines whether investor opinions expressed in social media predicted stock returns of financial firms during the 2007-2009 global financial crisis. We conduct a textual analysis of the articles published on the stock market insight website Seeking Alpha before the crisis and find that banks that were described in articles with a higher fraction of negative words experienced:

(1) sharper drops in stock prices,

(2) larger increases in expected default probability, and

(3) greater surges in nonperforming loans during the crisis.

Our evidence suggests that wisdom of crowds provides valuable information on how banks weather a forthcoming crisis.

Keywords: Social Media; Textual Analysis; Financial Crisis; Predictability; Seeking Alpha

JEL Classification: G01; G14; G17; G21

Suggested Citation

Chau, Michael and Lin, Chih-Yung and Lin, Tse-Chun, Wisdom of Crowds Before the 2007-2009 Global Financial Crisis (March 28, 2020). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3558486

Michael Chau

The University of Hong Kong ( email )

School of Business, K.K.Leung Building
The University of Hong Kong, Pokfulam Road
Hong Kong
Hong Kong

HOME PAGE: http://www.business.hku.hk/~mchau/

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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