Economic Narratives and International Asset Pricing

Abstract

This paper examines the implications of economic narratives for international asset pricing. We quantitatively measure economic narratives through the full text content of over 880,000 The Wall Street Journal articles and represent them as interpretable news topics. We construct market-level narrative indices for 14 developed markets using the Partial Least Squares (PLS) method, and demonstrate that these indices significantly predict market-level aggregate stock returns, both in- and out-of-sample. Furthermore, we find that the predictive power of our indices is driven by common narrative information, which is linked to global-level pricing factors such as macroeconomic condition, economic policy uncertainty, and disaster risk. Additional, economic narratives affect aggregate stock returns through both cash flow and discount rate channels.

Keywords: Economic narratives; International stock markets; Return predictability; Partial Least Square

JEL Classification: G12, G15