How Novelty and Narratives Drive the Stock Market

Abstract

'Animal spirits' is a term that describes the instincts and emotions driving human behaviour in economic settings. In recent years, this concept has been discussed in relation to the emerging field of narrative economics. When unscheduled events hit the stock market, from corporate scandals and technological breakthroughs to recessions and pandemics, relationships driving returns change in unforeseeable ways. To deal with uncertainty, investors engage in narratives which simplify the complexity of real-time, non-routine change. This book assesses the novelty-narrative hypothesis for the U.S. stock market by conducting a comprehensive investigation of unscheduled events using big data textual analysis of financial news. This important contribution to the field of narrative economics finds that major macro events and associated narratives spill over into the churning stream of corporate novelty and sub-narratives, spawning different forms of unforeseeable stock market instability.

Alternatives to the efficient market hypothesis: an overview

“…The events surrounding the COVID-19 pandemic coupled with the rising importance of economic narratives as initially described by Shiller (2019a, b), led to the emergence of yet another alternative to the EMH that seeks to describe the role of information in financial markets, especially in the presence of black swan events. The NNH (Mangee, 2021) seeks to bring to the fore the role of information in an environment that has been exposed to a novel event. Where there is a novelty, there are increased tendencies for instability which tend to increase the levels of uncertainty in turn.…”

Why Do Key Decision-Makers Fail to Foresee Extreme ‘Black Swan’ Events? A Case Study of the Pike River Mine Disaster, New Zealand

“…Like business or economic models, narratives inherently simplify complexity and uncertainty [21]. Mangee [10] (p. 3) believes that, 'Where there is uncertainty there are narrativesnarratives are the currency of uncertainty'. One aspect of this, is what Kay and King [7] call an organisation's 'reference narrative', being the collective management/board mindset.…”

“…The use of a 'narrative' as a frame, framework or construct is common in the social sciences or in futures research [43], but in economics using narratives is a relatively novel concept, since mainstream economics has historically assumed that preferences are located exclusively with the individual and economic models deal exclusively with decision-making under Knightian risk (i.e., known or assumed probabilities) rather than under Knightian uncertainty (i.e., unknown probabilities) [21]. More recent approaches to economics such as feedback economics [44] or narrative economics [10,45] challenge that approach.…”

Expectations Concordance and Stock Market Volatility: Knightian Uncertainty in the Year of the Pandemic

“…231, 321). For recent evidence in support of Knight's views, see (Hendry and Doornik (2014); Hendry (2018); Frydman et al (2015); Mangee and Goldberg (2020); Mangee (2021aMangee ( , 2021b).…”

“…The rules and scoring instructions follow Mangee (2021b, Chapter 4 and Appendix B). 6 Here, we summarize the aspects of Mangee's (2021b) approach for quantifying the narrative Bloomberg wraps for stock prices in response to KU events. First, we operationalize KU events by excluding the events that are associated with government agency releases or quarterly firm reports.…”