11 - A Manual Novelty-Narrative Scapegoat Analysis

Summary

This chapter applies a manual textual analysis of scapegoat effects in the stock market under the Novelty–Narrative Hypothesis. Information contained in Bloomberg News daily market wrap reports proxy for the story-weights investors place on observable and unobservable micro and macro fundamentals. Findings of dramatic variation in the narrative-based attention investors place across particular fundamentals suggests instability, in both frequency and magnitude, characterizing their forecasting strategies of future stock market outcomes. Time-varying properties of the narratives are found to be connected to shifts in the underlying variables particularly level- and gap-effects. Evidence suggests that adding narrative dynamics as proxied by scapegoat effects to benchmark macro-finance models improves fundamentals' ability to explain stock price fluctuations under uncertainty. Measures of model fit and forecasting accuracy provide the most empirical support for varying-coefficient scapegoat models based on micro and macro novel events and narrative effects, or attention-weights, attached to fundamentals.