4. Experimentación
4.2. Caracteritzación de contactos selectivos
With the increasing interest towards informational content of qualitative texts, scholars have attempted to estimate investor sentiment (information content and tone) from different sources of qualitative texts in order to study the relationship between sentiment and important financial metrics. Major sources for qualitative texts include: news articles (e.g., Chan, 2003; Antweiler and Frank, 2006; Tetlock, 2007; Kothari et al., 2008; Tetlock et al., 2008; Bushee et al., 2010), company press releases75 (e.g., Davis et al., 2008; Engelberg, 2008; Henry, 2008; Bhattacharya et al., 2009; Demers and Vega, 2010), 10-ks (e.g., Li, 2006, 2008; Kothari et al., 2008; Loughran and McDonald, 2011) and Internet message boards (Antweiler and Frank, 2004; Das and Chen, 2006). Recently, social media (e.g. Twitter) has also sparked the interest of researchers. Also, the impact of aggregate market news volume on financial metrics has been studied (e.g., Mitchell and Mulherin, 1994; Hirsleifer, 2009) as well as the impact of firm specific media coverage (e.g., Barber and Odean, 2008; Fang and Peress, 2009; Loukusa, 2011). Majority of the studies has tried to link investor sentiment with one of
73 As shown in Section 2.2., with representativeness bias, the saliency of the model is the vital component in
determining which information source agents overweight at the cost of the other. In financial context, point- estimates are often more salient due to valuation models utilizing point-estimates as their inputs. Therefore, qualitative text is often more abstract to agent, and is therefore underweighted in many cases.
74 In connection with the aforementioned, Krishna and Morgan (2004) with Demers and Vega (2010) show that
multiple experts (sources of information: i.e., news and analyst press releases) improve information credibility and the subsequent reaction to the information in qualitative text. As a result, it is possible that agents underreact to news as they discount the informational value of qualitative text due to loose regulation.
75 Including various forms of corporate press releases and disclosures such as: earnings announcements, IPO
the following financial metrics: raw returns76, abnormal returns77, trading volume78, return volatility79 or earnings80.
Sentiment and returns
Majority of studies81 has found a significant reaction between investor sentiment changes and returns. The type of reaction found has been underreaction.
Chan (2003) finds underreaction to news with a comprehensive list of news publications including Dow Jones Newswire service, which Tetlock et al. (2008) find to have novel information content resulting in an underreaction to sentiment changes. Furthermore, studies on other qualitative text sources have found results consistent with underreaction (e.g., Li, 2006; Engelberg, 2008; Demers and Vega, 2010; Loughran and McDonald, 2011). Also, prior literature has found that simultaneously released information sources distract investors resulting in stronger underreaction to information (Hirsleifer et al., 2009). Hirsleifer et al., name this phenomenon as ‘the distraction hypothesis’ which is based on limited attention theory. Tetlock et al. (2008) study offers some support for Hirsleifer et al.’s findings demonstrating evidence that earnings related news cluster around earnings announcements, while earnings announcements occur almost always during the same time period, and that news that have the word stem ‘earn’ predict stronger underreaction. Tetlock et al. interpret that such news articles deal with fundamentals and therefore qualitative texts concerning fundamentals have more information content and subsequently more impact.82 However, an alternative conclusion might be drawn to support Hirsleifer et al.’s later study, suggesting that news with the stem ‘earn’ are news dealing with earnings announcements and as such are released in close proximity to earnings announcements. If this is the case, such news are released during a time when qualitative information, with quantitative information, floods the
76
E.g., Chan, 2003; Antweiler and Frank, 2004; Tetlock, 2007; Tetlock et al., 2008.
77 E.g., Chan, 2003; Li, 2006; Engelberg, 2008; Tetlock et al., 2008; Hirsleifer et al., 2009; Demers and Vega,
2010; Loughran and McDonald, 2011.
78
E.g., Antweiler and Frank, 2004, 2006; Tetlock, 2007; Hirsleifer et al., 2009; Loughran and McDonald, 2011.
79 E.g., Antweiler and Frank, 2004; Demers and Vega, 2010; Loughran and McDonald, 2011. 80 E.g., Li, 2006, 2008; Tetlock et al., 2008; Loughran and McDonald, 2011
81 Exceptions include of Antweiler and Frank (2004) and Das and Chen (2006). However, the aforementioned
authors study internet message board data that does not seem to have incremental value over quantitative information. Furthermore, both studies have had fairly limited sample sizes. Also, their methods rely on more sophisticated - and complex - methodologies for estimating investor sentiment that have not yet yielded good results.
82 Tetlock et al. (2008) do not discuss any alternative interpretations for their result, but conclude that the finding
is in line with their initial hypothesis. Therefore, one might present the argument that the psychological bias of ‘belief perseverance’ is clouding their interpretation.
market causing greater distraction with more severe underreaction in line with the distraction hypothesis suggested by Hirsleifer et al., and the limited attention theory.
Some studies document also overreaction to sentiment changes: Tetlock (2007) finds that Down Jones Index raw returns overreact to Wall Street Journal [WSJ] articles within one day of the event and reverse back to fundamentals within the next 5 trading days. Tetlock infers that the news articles carry no additional information content, and the reversal is consistent with the EMH. However, Tetlock (2007) studies WSJ articles which are later found to have no significance in relation to financial metrics in a study by Tetlock et al. (2008). In fact, Tetlock et al. (2008) hypothesizes that WSJ articles simply recapitulate previous news and therefore have no new information content, and as such should have no reaction. However, in light of the framing bias discussed in previous sections, one can argue that the tone of WSJ articles affects agents’ decisions resulting in overreaction to sentiment documented by Tetlock (2007), and the subsequent gradual reversal back to fundamentals. Therefore, depending on the information content of qualitative text, underreaction and overreaction are both possibilities.83 Indeed, Antweiler and Frank (2006) also find initial overreaction to sentiment changes from WSJ articles that reverses later on. The findings of Antweiler and Frank give support to our reasoning on overreaction with sentiment changes based on WSJ articles.
In terms of event windows used in the prior literature, most of the studies have focused on short-term reactions with event windows equal to, or shorter than, 4-days (e.g., Tetlock, 2007; Davis et al., 2008; Tetlock et al., 2008; Loughran and McDonald, 2011).84 As a result, the intermediate- and long-term effects of sentiment changes, and the impact of such results on the efficiency of the market, have been neglected to some extent by prior literature. Some recent studies have employed longer event windows (e.g., Engelberg, 2008; Demers and Vega, 2010)85 in addition to short-term windows with findings that suggest that underreaction continues long after the opening of the event window in violation with the proposition of the EMH.
83
Tetlock (2007) dubs the alternative theories as: sentiment hypothesis (reversal) and information hypothesis (underreaction).
84 Potentially due to the critique that has been directed towards longer event windows and the consequent
increase in the severity of ‘bad model’ problems associated with them (e.g., Fama, 1991, 1998; Malkiel, 2003) – more on Section 2.1.
85 Engelberg (2008) states that his study is the first to show content of financial media can predict asset prices in
Besides studying the link between returns and sentiment, scholars have attempted to build trading strategies to test the economic significance of the relationship between sentiment and returns (e.g., Li, 2006; Tetlock, 2007; Engelberg, 2008; Tetlock et al., 2008; Loughran and McDonald, 2011). As some EMH proponents have argued, an economically more feasible form of the EMH (e.g., Jensen, 1978) is not against market efficiency but in fact in line with it. Therefore, for an anomaly to be against all the definitions of market efficiency, it must stand and survive the test of economic significance.
To study economic significance, trading strategies are constructed. Most of the trading strategies are based on prior year’s distribution of sentiment. By utilizing prior year’s distribution, the strategies take both long- and short-positions based on the magnitude of the sentiment change vis-à-vis prior year’s sentiment distribution (e.g., Li, 2006; Tetlock, 2007; Tetlock et al., 2008; Loughran and McDonald, 2011). At the moment, it seems that the economically feasible form of the EMH stands unwavering against the results. In other words, the link between sentiment change and abnormal profits is not strong enough to survive transaction costs (e.g., Tetlock, 2007; Tetlock et al., 2008; Loughran and McDonald, 2011).86 However, as Tetlock et al. (2008) point out, the methodologies used for estimating investor sentiment are rudimentary as of now and as such the estimates are biased downwards due to measurement error. Therefore, the magnitudes of the sentiment coefficients are in reality more significant, as would the subsequent results be with more accurate sentiment estimates. Also, Tetlock et al. (2008) suggests that by creating more elaborate trading strategies, the economic significance might turn out to be different, and could be in violation with the economically more feasible form of the EMH.
Sentiment and trading volume
Depending on the information content of qualitative texts, sentiment level changes can impact trading volume in differing ways. As Tetlock (2007) notes, sentiment changes with no new information content will result in overreaction and therefore a volume increase. However, in Tetlock’s view, the hypothesis with sentiment change in the case of new information is unclear.87
86Some studies have been able to establish trading strategies that have been able to stand the test of transaction
costs, and emerge as victors (e.g., Li, 2006; Engelberg, 2008)
87 In line with his hypotheses, Tetlock (2007) finds that sentiment changes in WSJ articles are matched with
Hirsleifer et al. (2009), state that in the presence of greater distraction, as measured by larger level of simultaneous earnings announcements, investors will underreact to new information and therefore volume will not be impacted, or it will be lower, in the short-term. Hirsleifer et al. interpretation suggests that underreaction is not accompanied by increase in volume in short-term. As we have demonstrated in the previous section, in the context of returns, most studies have found that qualitative texts have new information, and that information is incorporated into prices with delay: underreaction. Therefore, one might infer that in the case that information content dominates over style and tone of the text, underreaction dominates. Subsequent short-term volume changes would therefore not be abnormal, as suggested by Hirsleifer et al. findings regarding aggregate market earnings announcements and volume levels.
On the other hand, Loughran and McDonald (2011) find that abnormal trading volume increases with sentiment changes. Loughran and McDonald’s results are more consistent with the interpretation that their qualitative information contains new content, and therefore the finding should not be attributed to the disagreement hypothesis88 suggested by Tetlock (2007). However, Loughran and McDonald’s event window differs from that of Tetlock’s (2007) potentially casting some light to the difference. Indeed, Loughran and McDonald’s event window is longer than that of Tetlock (2007); 4-days vis-à-vis 1-day event window. Therefore, Loughran and McDonald’s results might be driven by the fact that volume levels reacts to new information with a lag.
We propose that the relationship between trading volume and sentiment seems to be related to information content vis-à-vis style and tone of qualitative texts as well as the event window length under review. Antweiler and Frank (2006) findings support our proposition: they find that initial overreaction is accompanied by increase in volume followed by declines in volume such would be the reaction with texts dominated by tone over content. In cases where investors react more to new information content (over tone of text), sentiment changes should have either no reaction or slightly positive reaction with trading volume in the short- term followed by slight increase in volume in the long run.
Sentiment and volatility
The impact of sentiment on return volatility has not been studied extensively in prior literature. To our knowledge, only the recent studies of Demers and Vega (2010) and Loughran and McDonald (2011) have studied the relationship. If we go back further in time, we find that Antweiler and Frank (2004) have also studied the impact of sentiment on return volatility with a limited sample of internet message board posts.
All of the aforementioned studies find a relationship between return volatility and a change in investor sentiment. The relationship seems clear: changes in sentiment (both towards more positive and towards more negative sentiment) predict increases in future return volatility.
Sentiment methodologies used in finance research
Crucial part of the research concerning the impact of qualitative text on financial metrics is the process of quantifying that text into a sentiment score (e.g., Loughran and McDonald, 2011). As content analysis is a rather new field in the domain of finance, the methodologies used so far in the extraction of investor sentiment have been relatively simple and rudimentary. In fact, Tetlock et al. (2008) argues that more complex methods of content analysis face two significant drawbacks: first, the need for human judgment; second, the difficulty to replicate the study by later research. Instead, Tetlock et al. advocate the use of established dictionaries (i.e., Harvard Psychology Dictionary) with word counting (i.e., ‘bag- of-words’ vector word counts) that give results four crucial attributes: parsimonious, objective, replicable and transparent. Tetlock et al. continue by arguing that the aforementioned attributes are crucial in the early stage of research in content analysis in the domain of finance. However, in slight contradiction with their own proposition, Tetlock et al. also urge researchers to develop less noisy measures of investor sentiment - effectively urging the use of more complex methodologies in estimating sentiment.89
Li (2009) rejects Tetlock et al. (2008) notion of using established dictionaries as there are no readily available dictionaries for the setting of business, and advocates also the use of statistical methods in word categorization. Such methods run head-on to the critique presented by Tetlock et al. (2008). Loughran and McDonald (2011) offer a potential solution to the dilemma by developing their own dictionaries for the domain of finance in the context of 10-k
89 By arguing the following, we link more complex methods with better estimates of sentiment. However, that is
not necessarily the case. Nevertheless, we do argue that at some point it is necessary to move towards more complex methods in estimating sentiment if we are to improve the accuracy of sentiment estimates as sentiment is extremely complex variable that requires a complex model to take into account all the required nuances.
reports.90 In fact, Loughran and McDonald show that Harvard Psychology Dictionary misclassifies words more than 70% of the time in finance context. On top of adding noise to the estimate, Loughran and McDonald assert that the misclassifications can in fact result in spurious correlations and type I errors. Loughran and McDonald conclude that future research should use their dictionaries in finance context.
As can be inferred from above, word counts (i.e., ‘bag-of-words’ vectors) with established dictionaries have been the most prominent method for quantifying qualitative texts in finance context (e.g., Tetlock et al., 2008). Yet, exceptions such as Antweiler and Frank (2004, 2006) and Das and Chen (2006) do exist that have used more complex methodology91. Also, more recently, Engelberg (2008) employs a typed dependency parsing method to extract sentiment using sentence structures. Engelberg states that his study is the first study in the domain of finance to employ content analysis methodology that utilizes sentence structures instead of words.
In order to employ word counts, researchers need to either choose dictionaries, or create their own. The early studies of sentiment in finance used only few specific words instead of full dictionaries. For instance, Li (2006) uses words ‘risk’ and ‘uncertainty’ to measure risk sentiment. Later on, since the seminal study of Tetlock (2007), academia moved on to use Harvard Psychology Dictionary, and to be more specific, the negative word category of the dictionary.92 As Tetlock (2007) shows in his study, the fraction of negative words to total words is a good proxy for sentiment that performs equally well with a variable created from all the 77 different Harvard Psychology Dictionary categories.93 However, with the recent influential paper of Loughran and McDonald (2011), the choice of dictionary for future research in the domain of finance is uncertain.
90
One can argue that Loughran and McDonald (2011) also fall prey to the critique of subjectivity. However, the authors construct their dictionaries to be as holistic as possible to avoid such critique.
91Antweiler and Frank (2004) and Das and Chen (2006) fail to find significant results with their main variable of
interest: returns. However, their failure can be also be a function of their sample: internet message boards, or sample size, rather than the methodology of choice.
92 Tetlock (2007) suspects that negation increases noise with positive words and causes them to lose significance.
However, Engelberg (2008) tests the amount of negation present in DJNS articles and finds that there is no substantial negation. Therefore, he rejects Tetlock (2007) explanation and suggests that misclassifications are responsible. Yet, when Loughran and McDonald (2011) create their own positive word list, they are unable to increase the significance of their results. Loughran and McDonald conclude that truly positive words are hard to isolate.
93 The latter variable is created based on past year’s data using principal component analysis which combines the
77 categories into a linear combination variable that captures maximum amount of variance out of the 77x77 covariance matrix.