Media abnormal tone and cross section of stock returns: Evidence from China

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Abstract

This paper introduces an innovative methodology for extracting information from textual data to explain cross-sectional stock returns, addressing limitations of conventional media tone measures. We find firms exhibiting higher media abnormal tone yield lower future returns in the Chinese market, even when controlling for common risk factors. This effect is more pronounced among firms with low investment, low profitability, and high short-term reversal. We also find the negative premium generated by media abnormal tone results from mispricing, highlighting investor overreaction despite media's role in disseminating concurrent firm information. Furthermore, the tendency for media outlets to follow suit exacerbates investor overreaction.

The sensitivity of risk premiums to the elasticity of intertemporal substitution

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Abstract

This paper incorporates reference-dependent preferences  into a consumption-based asset pricing model featuring Epstein–Zin utility. Three relevant results emerge from this extension. First, agents prefer the late resolution of uncertainty in recursive utility. Second, the late resolution of uncertainty helps replicate the downward-sloping term structure of market excess return. Third, the intertemporal substitution elasticity is more sensitive to asset prices through increasing precautionary saving motivations. A closed-form solution for the proposed model largely explains (i) high, volatile, and countercyclical equity premiums; (ii) low risk-free rates; and (iii) the downward-sloping term structure of equity premiums and variance ratios.