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Wisdom of crowds before the 2007–2009 global financial crisis

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  • Chau, Michael
  • Lin, Chih-Yung
  • Lin, Tse-Chun

Abstract

Our paper examines whether investor opinions expressed in social media predicted stock returns of financial firms during the 2007–2009 global financial crisis. We conduct a textual analysis of the articles published on the stock market insight website Seeking Alpha before the crisis and find that banks that were described in articles with a higher fraction of negative words experienced (1) sharper drops in stock prices, (2) larger increases in expected default probability, and (3) greater surges in nonperforming loans during the crisis. Our evidence suggests that wisdom of crowds provides valuable information on how banks weather a forthcoming crisis.

Suggested Citation

  • Chau, Michael & Lin, Chih-Yung & Lin, Tse-Chun, 2020. "Wisdom of crowds before the 2007–2009 global financial crisis," Journal of Financial Stability, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finsta:v:48:y:2020:i:c:s157230892030019x
    DOI: 10.1016/j.jfs.2020.100741
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    More about this item

    Keywords

    Social media; Textual analysis; Financial crisis; Predictability; Seeking alpha;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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