News and Markets in the Time of COVID-19

Abstract

The onset COVID-19 was characterized by voluminous, negative news. Higher narrativity news topics – measured by textual proximity to articles describing the 1987 stock market crash and textual distance from Federal Reserve communications – were systematically associated with contemporaneous market responses, which were larger on high volatility days (hypersensitivity), and with markets-news feedback. Hypersensitive news topic-market pairs were associated with next-day reversals. A test using the news-markets relationship identifies a mid-March 2020 structural break, which was knowable by the end of April. Post break, markets and news became considerably less coupled, and hypersensitivity and reversals abated.

Keywords: asset pricing; NLP; natural disasters; behavioral finance

JEL Classification: G10, G12, G14, G41