Quantifying investor narratives and their role during COVID‐19

Abstract

Summary This paper elicits and quantifies narratives from open‐ended surveys sent daily to US stockholders during the first wave of the COVID‐19 pandemic. Using textual analysis, we extract 13 narratives and measure their prevalence over time. A validation analysis confirms the behavioral and economic relevance of the retrieved narratives. Moreover, we find that the narratives contain predictive information for future excess stock and bond returns, and this predictability remains when controlling for contemporaneous information stemming from news and social media. Finally, we find evidence that political identity is reflected in the narrative tone.

Narratives About the Macroeconomy

“…In particular, the comparison of household and expert narratives allows us to identify unique features of household narratives, such as their fragmented and politicized nature. Importantly, our DAG-based approach allows us to quantify the causal structure of economic narratives, which cannot be detected by common existing techniques such as topic modeling or simple word-counting techniques (e.g., Borup et al, 2021;Hansen et al, 2018;Müller et al, 2022;Shiller, 2017Shiller, , 2020. However, the causal structure that individuals perceive behind past events is crucial when it comes to forecasting future economic outcomes or interpreting new information.…”

Investor bias, risk and price volatility

“…The role of narratives is significant in economic decision making as Shiller (2020a) claims that some narratives go viral among the public. Recent empirical evidence shows that narrations are quite important and significant in impacting economic outcomes and financial markets (Goetzmann et al, 2016;Bhargava et al, 2022;Borup et al, 2022). Salient news and the dominant narratives may influence the risk assessment of investors (Goetzmann et al, 2016) which may derive the prices away from the benchmark rational prices in our model.…”

“…As an example, their market crash narrative plays a significant role in explaining US equity markets. Borup et al (2022) quantify investor narratives during the Covid-19 pandemic by extracting narratives from an open-ended survey. They claim that the pandemic created an important opportunity as a natural experiment to analyze the impact of narratives which is overlooked in the economic theory.…”

“…As an example, their market crash narrative plays a significant role in explaining US equity markets. Borup et al. (2022) quantify investor narratives during the Covid-19 pandemic by extracting narratives from an open-ended survey.…”

Going Mainstream: Cryptocurrency Narratives in Newspapers

“…(Shiller, 2017, p.967), there has been an emerging literature that theorises and quantifies the economic impact of narratives. While Shiller's focus was predominantly on narratives that could be considered viral, recent studies have expanded this scope to encompasse various issues, with a particular focus on risk and returns in financial markets (Adämmer & Schüssler, 2020;Dierckx, Davis, & Schoutens, 2021;Ke, Kelly, & Xiu, 2019;Borup, Hansen, Liengaard, & Montes Schütte, 2023;Bybee, Kelly, & Su, 2022). Others have demonstrated the economic impact of narratives (Larsen & Thorsrud, 2018;Bybee, Kelly, Manela, & Xiu, 2023;Bertsch, Hull, & Zhang, 2021;Larsen, Thorsrud, & Zhulanova, 2021;van Binsbergen, Bryzgalova, Mukhopadhyay, & Sharma, 2024;Flynn & Sastry, 2022), their political importance (Jelveh, Kogut, & Naidu, 2022;Eliaz & Spiegler, 2020), and used them to measure geopolitical risk (Caldara & Iacoviello, 2022).…”