Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text

58 Pages Posted: 2 Aug 2021 Last revised: 14 Sep 2021

See all articles by Leland Bybee

Leland Bybee

Yale School of Management

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Yinan Su

Johns Hopkins University - Carey Business School

Date Written: July 28, 2021

Abstract

We seek fundamental risks from news text. Conceptually, news is closely related to the idea of systematic risk, in particular the "state variables" in the ICAPM. News captures investors' concerns about future investment opportunities, and hence drives the current pricing kernel. This paper demonstrates a way to extract a parsimonious set of risk factors and eventually a univariate pricing kernel from news text. The state variables are reduced and selected from the variations in attention allocated to different news narratives. As a result, the risk factors attain clear text-based interpretability as well as top-of-the-line asset pricing performance. The empirical method integrates topic modeling (LDA), latent factor analysis (IPCA), and variable selection (group lasso).

Keywords: news, narratives, textual analysis, cross section of returns, ICAPM, factor model, IPCA, variable selection

JEL Classification: C38, C52, G11, G12

Suggested Citation

Bybee, Leland and Kelly, Bryan T. and Su, Yinan, Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text (July 28, 2021). Johns Hopkins Carey Business School Research Paper No. 21-09, Available at SSRN: https://ssrn.com/abstract=3895277 or http://dx.doi.org/10.2139/ssrn.3895277

Leland Bybee

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yinan Su

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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