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Published online by Cambridge University Press: 31 October 2023
The onset of COVID-19 was characterized by voluminous, negative news. Higher narrativity news topics (measured by textual proximity to articles describing the 1987 stock market crash and textual distance from Federal Reserve communications) were systematically associated with contemporaneous market responses, which were larger on high volatility days (hypersensitivity), and with markets–news feedback. Hypersensitive news topic-market pairs were associated with next-day reversals. A test using the news–markets relationship identifies a mid-March 2020 structural break, which was knowable by the end of April. Post break, markets and news became considerably less coupled, and hypersensitivity and reversals abated.
I thank Charles Calomiris, Jennifer Conrad (the editor), Paul Glasserman, Markus Schwedeler (the referee), and Ivo Welch for their helpful suggestions, as well as seminar participants from Columbia, the 2021 European Winter Meeting of the Econometric Society, the Kansas City Fed, Maryland, the Office of the Comptroller of the Currency, QWAFAxNEW, UBS, and the 2020 Wolfe Research NLP and ML Conference. Jiashu Sun and Xinran Zhang provided excellent research assistance. An earlier version of this article appeared under the title “Financial Markets and News About the Coronavirus.”