Economic Narratives and International Asset Pricing

48 Pages Posted: 25 Sep 2023 Last revised: 3 Jan 2024

See all articles by Fuwei Jiang

Fuwei Jiang

Xiamen University

Hongkui Liu

Chinese Academy of Social Sciences (CASS) - Institute of Economics

Jiasheng Yu

Central University of Finance and Economics (CUFE) - School of Finance

Huajing Zhang

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: September 6, 2023

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

Suggested Citation

Jiang, Fuwei and Liu, Hongkui and Yu, Jiasheng and Zhang, Huajing, Economic Narratives and International Asset Pricing (September 6, 2023). Available at SSRN: https://ssrn.com/abstract=4562754 or http://dx.doi.org/10.2139/ssrn.4562754

Fuwei Jiang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Hongkui Liu

Chinese Academy of Social Sciences (CASS) - Institute of Economics

Jiasheng Yu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Shahe Higher Education Park, Changping District
Beijing, 102206
China

Huajing Zhang

Central University of Finance and Economics (CUFE) - School of Finance ( email )

China

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