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The Effect of Media Communication on Stock Returns

Posted by
Swiss Finance Institute
Tuesday, November 22, 2016 - 09:00

In the SFI financial communications series, recent articles have looked at how managers’ communications and negative sentiment affect financial markets, it is now interesting to take a look at the effect media has on the markets. Prof. Rajna Gibson Brandon, SFI@UNIGE, along with co-authors Hemmens and Trépanier are studying the effects words used by the media have on stock returns. Their initial results are documented in the paper Market Irrationality in the Media and its Effects on Stock Returns. The initial findings were also discussed in an article in Bloomberg. The research is ongoing, the results will be forthcoming in early 2017, and will be discussed in a later article. However, it is already interesting to consider the hypothesis and method used.


Objectives of the Study

The study investigates the impact on stock returns of the use of irrational language by the media. The research will fortify the field of behavioral finance with empirical evidence on this topic.  


The objectives of the study are twofold. Firstly, to evaluate the ability of the market irrationality sentiment measure (which the researchers created by looking at media reporting on stocks) to forecast volatility in the market. Secondly, to examine whether market irrationality is a priced risk factor.



The study theorizes that media irrationality in the market “has a significantly negative effect on subsequent stock market returns” and also increases stock market volatility. Market irrationality refers to the types of words used by the press to report on the markets.


The study also looks at the time frame in which the effects are felt. It seems that the impact of market irrationality takes time to manifest, with a significant impact three days after the irrational media statements, after which there is a weak reversal of the effects around a week later. The time lags indicate that the information is complex and takes some time to be incorporated into the actions of investors, which impacts the market.


Method of the Study

A lexicon of words that describe irrational behavior was constructed, in order to study the effect of media language on the market. Examples of words used by the media that may generate irrationality in the market include “bonkers” and “baffling”, as well as “demented” and “dizzy.” The lexicon, which consists of 144 words, was validated independently by experts working in the fields of psychology and neuroscience.


The researchers then created a market irrationality sentiment measure by looking at the financial press over a 15-year period to identify articles from a wide range of news sources that link irrational behavior with the stock markets. The numerical measure is created by computing the proportion of words from the irrationality lexicon that appears in the news articles under review.


The irrationality risk factor is then estimated. Stock portfolios are then constructed and sorted according to their sensitivity to the risk factor. Irrationality risk betas (the measure of volatility or risk in the stock) can then be assessed from the data.


Results of the Study

The research contributes to the field of behavioral finance and the study of investor irrationality and also contributes to the literature on language in the media and its impact on financial markets. As mentioned above, this research is currently ongoing, and the results are due at the end of 2016 or early 2017 and will be the subject of a further article.


Studies like these continue to highlight the importance of effective communication in business, because connotations conveyed in a communication, as well as the sentiment created, are arguably as important as the raw returns data.


Faculty expertise provided by Prof. Rajna Gibson Brandon


Read the other posts in this series:

The Importance of Communication in Financial Markets.

How Does Managerial Tone Affect Market Reactions?

How Does the Use of Vague Words Affect Market Reactions?

The Effect of Negative Sentiment on the Global Economy