Financial Press and Stock Markets in Times of Crisis

Abstract

This paper investigates the relationship between negative news in financial newspapers and stock markets in times of global crisis, such as the 2008/2009 period. We analysed one year of front page banner headlines of three financial newspapers, such as the Wall Street Journal, Financial Times, and Il Sole24ore and created an index of bad news at a daily base. We examined the influence of bad news both on market volatility and dynamic correlation of American, Britain and Italian stock markets to look at the impact of bad news on global investment strategies. Our results show that press and markets co-influenced each other in generating market volatility. The three newspapers showed significant differences in their stance on the crisis, with Financial Times more pessimistic. Our results also show that Wall Street Journal bad news had higher predictability value for the correlation between US and the foreign markets. This confirms the international influence of Wall Street Journal. Financial press and stock markets in times of crisis KeywordsRoberto Casarin † Flaminio Squazzoni ‡ † University Ca' Foscari of Venice ‡ University of Brescia May 16, 2012Abstract This paper investigates the relationship between negative news in financial newspapers and stock markets in times of global crisis, such as the 2008/2009 period. We analysed one year of front page banner headlines of three financial newspapers, such as the Wall Street Journal, Financial Times, and Il Sole24ore and created an index of bad news at a daily base. We examined the influence of bad news both on market volatility and dynamic correlation of American, Britain and Italian stock markets to look at the impact of bad news on global investment strategies. Our results show that press and markets co-influenced each other in generating market volatility. The three newspapers showed significant differences in their stance on the crisis, with Financial Times more pessimistic. Our results also show that Wall Street Journal bad news had higher predictability value for the correlation between US and the foreign markets. This confirms the international influence of Wall Street Journal.

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

“…Communication theories about source credibility, third-person effects and two-step-flow communication suggest that financial news may affect markets. This study about the impact of the news on share prices of Dutch financials during the credit crisis (July 2007 -March 2009) provides evidence for the latter, in line with a series of other recent studies on the impact of news on financial markets (Bollen et al, 2011;Casarin and Squazzoni, 2012;Engelberg and Parsons, 2011;Fang and Peress, 2009;Mitra and Mitra, 2011;Tetlock et al, 2008). The framing of Dutch financials in the news as carriers of the credit crisis had an impact on share prices.…”

Story beneath story: Do magazine articles reveal forthcoming returns on stock market?

“…We did not restrict ourselves to front page banner headlines like previous studies (Casarin and Squazzoni, 2012) rather, we comprehensively covered periods of market volatility like Dot Com bubble and Sub-prime crisis 2008 to 2009. Albeit, we could not unearth any temporal significance primarily because of Pakistan"s limited international financial linkages that averted contagion repercussions of Dot Com bubble and domino effect of Sub-prime crisis.…”

Are crises sentimental?

“…Additionally, the authoritative international press contributes a cascade of sentiment to the local press; (b) because financial markets have become much more interdependent, news in the international financial press could influence the correlation of markets and global investment strategies. On this point, Casarin and Squazzoni (2012) analyze the relationship between three stock markets (including US, UK and Italy markets) and negative news in The WSJ, Financial Times and II Sole24ore. They found that The WSJ is the only source that significantly affects the volatility of all three market indexes.…”

“…Taken together, it is possible that sentiment in the authoritative finance press could be a leading indicator of crises because it amplifies the animal spirits of investors in times of increasing uncertainty. On this subject, Casarin and Squazzoni (2012) show that bad news in The Wall Street Journal had high predictability value for the correlation between US and foreign markets during the 2008 financial crisis. However, previous studies have rarely touched on the role of sentiment in stock market crisis prediction.…”