October 2023


Do media narratives influence financial markets?

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Just like social media fuels consumer trends, media narratives are influencing financial markets and investor behavior.

According to Ronnie Sadka, Haub family professor of finance, senior associate dean for faculty, finance department, chairperson at Boston College's Carroll School of Management, and academic partner at State Street Associates, media-derived narratives are driving markets over the long run, and serve as a good tool for predicting market returns beyond traditional indicators.

Trending narratives outperform
Using data sourced from State Street’s MediaStats Series – an artificial intelligence (AI) platform that transforms millions of unstructured media data points into actionable insights for institutional investors – Sadka quantified the narratives against portfolios he constructed based on recent popular narratives. In all, 150,000 digital media sources and roughly 350 narratives from MediaStats – a collaboration between Cambridge, Massachusetts-based MKT MediaStats and State Street Global Markets – were used in the analysis.

Sadka’s findings showed that portfolios containing assets that reflect trending narratives outperform those with themes of descending media coverage. The results suggest that investors respond better to short-run narratives than to long-run narrative trends.

Enhanced asset allocation
Media-derived narratives, whether true or not, help explain market-wide moves and may be used to enhance asset allocation strategies. As Sadka explained, narrative indicators can help measure exposures and stock returns in a meaningful way. “Stocks exposed to narratives with recent increased intensity exhibit positive earnings growth for up to a year,” he said.

As Sadka concluded, popular thinking and trends ultimately drive an individual’s decisions about how and where to invest. For this reason, it is increasingly important for investors to track economic media narratives and understand how they influence financial markets and how they can impact asset prices over time.

“Investors and analysts are underreacting to valuable information about future cash flow that are reflected in the narratives. They often don’t act or react to narrative discussions too late,” he said. “Artificial intelligence, which is currently a big deal, I would say will show up in future cash flows.”

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