Categories: OLD Media Moves

Professor studies stock price changes and business journalism

Michael Blanding of the Tuck business school at Dartmouth writes about the research of visiting professor Diego Garcia, who examines the relationship between stock price movements and how they are written about in the financial press.

Blanding writes, “‘Journalists do not make much out of positive returns in the market,’ says Garcia. ‘On very good days, they don’t seem very upbeat. On the other hand, on bad days they really play up the bad returns.’ Even more surprisingly, Garcia found that the negative spin by columnists can have a downward effect on the market. ‘You could almost trade on it,’ says Garcia. ‘If you are a hedge fund manager, you could read the paper in the morning and just by doing what it says, become a millionaire.’

“But don’t get rid of your financial adviser just yet. Garcia uncovered these novel links between news and the stock market in an exhaustive search across historical newspaper columns covering a century. ‘When the New York Times historical archives first came online, I was looking them over out of curiosity and realized a number of columns were printed almost daily since the early 1900s,’ he says. ‘Then the Wall Street Journal archives start in 1920. I thought this could be an interesting dataset.’

“He took several columns from the Times, namely ‘Financial Markets’ and ‘Topics in Wall-Street,’ along with the ‘Abreast of the Market’ column from the Journal, and electronically ‘read’ every copy of them between 1905 and 2005. By “reading” he means that, using dictionaries from psychology, he counted the number of positive and negative words in each story, and compared the daily totals to the Dow Jones Industrial Average each day.

“When he did so, he found that the when the market dropped from a return of +1 percent to -1 percent, the columnists used 1.5 times as many negative words the following day (rising to 3 percent of total words from 2 percent). When the market dropped from -1 percent to -3 percent, it added another percentage point of negative words, bringing the total to 4 percent, or twice as many negative words as on average.”