Text-based Fiscal News and the Cross-section of Stock Returns

Abstract

Using 9,524 speeches by U.S. presidents over the last century, this paper implements textual analysis to construct long time-series index for fiscal policy. The Fiscal News Index is a strong predictor in the cross-section of stock returns. Investors demand higher expected returns for holding stocks with high exposure to Fiscal News Index. The pricing implications of the Fiscal News Index are mainly through the discount rate news channel. Empirical results suggest that the Fiscal News Index outperforms other business cycle indicators in terms of pricing the cross-section of stock returns. The pricing implication of the Fiscal News Index is also reflected in currency returns.

Keywords: fiscal news, cross-sectional stock returns, textual analysis, big data

JEL Classification: G18, G12