The Role of The Media in Crashing Stock Prices of Financial Institutions (and how to play it)

Via SSRN:

The Role of Media in the Credit Crunch: The Case of the Banking Sector

Tomasz Piotr Wisniewski

University of Leicester

Brendan John Lambe

University of Leicester

October 22, 2010

Abstract:     
Using a Vector Autoregression framework, this paper investigates the dynamic relationship between the intensity of negative media speculation and the market performance of financial institutions. Evidence is provided that over the sub-prime crisis period pessimistic coverage Granger-caused the returns on banking indices, while causality in the opposite direction proved weaker. These findings may imply that journalists not only report on the state of economic reality, but also play an active role in creating it. Investors acting upon sentiment implicit in media reports would have been able to improve their investment performance, as measured by Sharpe ratios and Jensen’s alphas.
Number of Pages in PDF File: 41
Keywords: Media, Stock Market, Financial Crisis, Self-fulfilling Prophecies
JEL Classifications: G01, G11, G21

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