Media tone is a priced risk factor in currency markets

Abstract

Media tone constructed from 7,000,000 articles from 2,000 global media and 800 social media sites is found to be a genuine risk factor that cross-sectionally prices currencies. It can predict excess US dollar returns for up to six months and surpasses the no-change benchmark in predicting returns out of sample. Its predicted value contains information beyond those predicted by currency factors and business cycles. Evidence collaborates with the theory that Media tone increases investment returns, has pronounced predictive power for the currencies associated with hard-to-value characteristics, and its predictive power increases with media sources. Trading of rational investors, including banks, is associated with Media tone.

Keywords: Media tone, Textual analysis, Exchange rates, Forecasting JEL Classification: F31, G12, G14, G17