Sentiment during Recessions



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    • Kenan-Flagler Business School, University of North Carolina at Chapel Hill. I would like to thank Malcolm Baker, Craig Carroll, Riccardo Colacito, Jennifer Conrad, Alex Edmans, Joey Engelberg, Francesca Gino, Mark Grinblatt, Anh Le, Michael Halling, Pab Jotikasthira, Patrick Kelly, Lisa Kramer, Øyvind Norli, Chris Parsons, Chris Roush, Francesco Sangiorgi, Günter Strobl, and Paul Tetlock for comments on an early draft, as well as seminar participants at UNC at Chapel Hill, the First International Moscow Finance Conference, the European Winter Finance Summit (2010), the 2011 FIRS conference, the Chinese University at Hong Kong, and the Central Bank of Serbia. The suggestions provided by the Editor (Cam Harvey), an anonymous Associate Editor, and the referee were critical in shaping the paper. I would also like to thank David Ernsthausen for superb research support. Special thanks to the CDLA staff, Kirill Fesenko, Fred Stipe, and particularly Rita Van Duinen, for their help in the optical character recognition stage of this project.


This paper studies the effect of sentiment on asset prices during the 20th century (1905 to 2005). As a proxy for sentiment, we use the fraction of positive and negative words in two columns of financial news from the New York Times. The main contribution of the paper is to show that, controlling for other well-known time-series patterns, the predictability of stock returns using news' content is concentrated in recessions. A one standard deviation shock to our news measure during recessions predicts a change in the conditional average return on the DJIA of 12 basis points over one day.