Crash Beliefs from Investor Surveys

Abstract

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w22143.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Media, sentiment and market performance in the long run

“…The correlation between our media pessimism indicator and the MSCI World is −47%, which suggests a strong negative contemporaneous relation between media pessimism and market returns at monthly frequency. This observation is consistent with the findings of García (2013), Goetzmann, Kim, and Shiller (2016), Tetlock (2007). However, our findings conflict with the results in Brown and Cliff (2004) and Kim and Kim (2014), which both show no contemporaneous effect of investor sentiment on stock markets.…”

“…García (2013) shows that the effect seems to reverse over the course of next four trading days. Goetzmann, Kim, and Shiller (2016) confirm these findings by reporting positive association of the prior day market returns and the count of positive and negative valence words in the financial press. The effect appears to be asymmetric and is more pronounced for extreme negative returns.…”

“…The authors demonstrate that investor sentiment affects stock markets contemporaneously and the effect reverses over the following trading days as investors realize the deviation from fundamentals. Da, Engelberg, and Gao (2013), García (2013), Goetzmann, Kim, and Shiller (2016), and Tetlock (2007) confirm these findings by showing evidence for the short-term predictive activity of investor sentiment on daily Dow Jones Industrial Average (DJIA) returns. Lee, Jiang, and Indro (2002) report a significant weekly contemporaneous effect of investor sentiment on the formation of conditional volatility and expected returns.…”

“…The previous literature suggests that media pessimism translates into investor sentiment and is associated with negative contemporaneous market returns and positive contemporaneous market volatilities (Antweiler and Frank 2004;García 2013;Goetzmann, Kim, and Shiller 2016;Tetlock 2007). In our study, we investigate the effect of media pessimism on the financial market performance over a longer horizon: three years.…”

Negative bubbles: What happens after a crash

“…Their findings are consistent with initial under-reaction and delayed overreaction which in turn are predicted by theories of sentiment. Evidence in Goetzmann et al (2017) suggests that market participants are consistently pessimistic vis-à-vis prospects for a major market crash. Crash fears implied by equity risk premium models and implied by option prices likewise suggest a consistent pessimism about an extreme event.…”