Financial news and market panics in the age of high-frequency sentiment trading algorithms

Abstract

Whether financial news may contribute to market panics is not an innocent question. A positive answer is easily used as a legitimation to limit the freedom of financial journalists. Long-term effects of news are moreover inconsistent with the Efficient Market Hypothesis (EMH), which maintains that new information gives immediately rise to a new equilibrium. The EMH is under discussion, however, as a result of the transformation of financial markets and of financial journalism due to new economic thoughts, new communication theories, high-frequency trading and high-frequency sentiment analysis. As a case study of a market panic we show the impact of US news, UK news and Dutch news on three Dutch banks during the financial crisis of 2007–9. To avoid market panics, financial journalists may strive for greater transparency, not only on asset prices and corporate philosophies, but also on network dependencies in the worldwide financial markets.

Forecasted economic change and the self-fulfilling prophecy in economic decision-making

“…Therefore this effect deserves replication, using sufficient sample and a fully counterbalanced design. We note however that this pattern accords well with findings in other areas of research that have shown negative economic news to produce stronger responses in various indicators of economic activity, compared to positive [6,9,10,13,14,16,19,29,31,33–35]. …”

“…In line with the proposal that economic forecasts in media news may generate a self-fulfilling prophecy effect [6,8,11–17,19,25–29,31,33–35] positive and negative economic messages caused participants to take more and less risk in the BART, respectively (Fig 2). Participants acted in accordance with the forecasted reality of the BART economy, adapting their risk taking as if the predicted change had already occurred, whereas in fact no change had occurred at all.…”

“…Recently, studies in finance and communication research have presented empirical findings in line with the idea that media economic news are responsible for stimulating or attenuating effects in the larger economy [6–35]. For instance, studies using content analyses have identified different frames used in reporting of economic news in the media [20–23], and studies using sentiment analyses have found correlations between tone and/or sentiment of media economic news or macro-economic announcements and changes in leading economic indicators [6,16,24–31]. By and large, these findings suggest that self-fulfilling prophecies may very well apply in the domain of economic decision-making: News provides people with a general belief on the direction of the economy, which in turn influences economic choice.…”

Being on the Field When the Game Is Still Under Way. The Financial Press and Stock Markets in Times of Crisis

“…In this case, communication research indicates that the perceived authoritativeness of news sources implies higher trust in the news from these sources ([20]). This effect has been empirically confirmed by a survey on 321 traders and 63 financial journalists from leading banks and financial news providers in the European foreign exchange market ([21]) and a recent case-study on three Dutch banks during the recent financial crisis ([14]). …”

“…Recent studies have shown that market responses to good and bad news is asymmetric. Indeed, investors are more sensitive to negative news, especially when the market is dominated by uncertainty and unpredictability, and this is an important source of market volatility (e.g., [8]; [9]; [10]; [11]; [12]; [13]; [14]). [15] found that stock prices overreacted to bad news even in good times and underreacted to good news in bad times.…”