Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2019 015

Media-expressed tone, Option Characteristics, and Stock Return Predictability

Cathy Yi-Hsuan Chen
Matthias R. Fengler
Wolfgang K. Härdle
Yanchu Liu

We distill tone from a huge assortment of NASDAQ articles to examine the
predictive power of media-expressed tone in single-stock option markets and
equity markets. We find that (1) option markets are impacted by media tone; (2)
option variables predict stock returns along with tone; (3) option variables
orthogonalized to public information and tone are more effective predictors of
stock returns; (4) overnight tone appears to be more informative than trading-
time tone, possibly due to a different thematic coverage of the trading versus
the overnight archive; (5) tone disagreement commands a strong positive risk
premium above and beyond market volatility.

option markets, equity markets, stock return predictability, media tone, topic

JEL Classification:
G12, G14, G41