New News is Bad News
General Finance
2023-09-12 v1 Pricing of Securities
Abstract
An increase in the novelty of news predicts negative stock market returns and negative macroeconomic outcomes over the next year. We quantify news novelty - changes in the distribution of news text - through an entropy measure, calculated using a recurrent neural network applied to a large news corpus. Entropy is a better out-of-sample predictor of market returns than a collection of standard measures. Cross-sectional entropy exposure carries a negative risk premium, suggesting that assets that positively covary with entropy hedge the aggregate risk associated with shifting news language. Entropy risk cannot be explained by existing long-short factors.
Keywords
Cite
@article{arxiv.2309.05560,
title = {New News is Bad News},
author = {Paul Glasserman and Harry Mamaysky and Jimmy Qin},
journal= {arXiv preprint arXiv:2309.05560},
year = {2023}
}