TAILIEUCHUNG - Giving Content to Investor Sentiment: The Role of Media in the Stock Market

I quantitatively measure the interactions between the media and the stock market using daily content from a popularWall Street Journal column. I find that high media pessimism predicts downward pressure on market prices followed by a reversion to fundamentals, and unusually high or low pessimism predicts high market trading volume. These and similar results are consistent with theoretical models of noise and liquidity traders, and are inconsistent with theories of media content as a proxy for new information about fundamental asset values, as a proxy for market volatility, or as a sideshow with no relationship to asset markets | THE JOURNAL OF FINANCE VOL. LXII NO. 3 JUNE 2007 Giving Content to Investor Sentiment The Role of Media in the Stock Market PAUL C. TETLOCK ABSTRACT I quantitatively measure the interactions between the media and the stock market using daily content from a popular Wall Street Journal column. I find that high media pessimism predicts downward pressure on market prices followed by a reversion to fundamentals and unusually high or low pessimism predicts high market trading volume. These and similar results are consistent with theoretical models of noise and liquidity traders and are inconsistent with theories of media content as a proxy for new information about fundamental asset values as a proxy for market volatility or as a sideshow with no relationship to asset markets. One of the more fascinating sections of the WSJ is on the inside of the back page under the standing headline Abreast of the Market. There you can read each day what the market did yesterday whether it went up down or sideways as measured by indexes like the Dow Jones Industrial Average . .In that column you can also read selected post-mortems from brokerage houses stock analysts and other professional track watchers explaining why the market yesterday did whatever it did sometimes with predictive nuggets about what it will do today or tomorrow. This is where the fascination lies. For no matter what the market did up down or sideways somebody will have a ready explanation. Vermont Royster Wall Street Journal Thinking Things Over Abaft of the Market January 15 1986 Casual observation suggests that the content of news about the stock market could be linked to investor psychology and sociology. However it is unclear whether the financial news media induces amplifies or simply ref lects investors interpretations of stock market performance. This paper attempts to Tetlock is at the McCombs School of Business University of Texas at Austin. I am indebted to Robert Stambaugh the editor an anonymous .

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